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Refinancing may be viable if your financial circumstances have changed since you initially secured your mortgage. Refinancing involves transferring your existing home loan to a different financial institution. This step can improve your financial standing by offering benefits such as lowered interest rates, reduced fees, more convenient repayment terms, or enhanced loan features.
What is Home Loan Refinancing?
Home Loan Refinancing involves transferring your outstanding loan balance from one financial institution to another. In this procedure, you establish a new home loan agreement with a different lender, allowing you to select an entirely new home loan product distinct from your current one. Consequently, comprehensive research is advisable.
During this endeavour, you can choose a home loan with the potential for a lower annual interest rate, reduced fees, or unique features compared to what your current lender offers. Additionally, you can transition from a variable-interest-rate home loan to a fixed-rate loan or even distribute your loan balance between two new home loans with varying interest rate structures.
When refinancing your existing loan, you might encounter enticing incentives, such as cash-back offers upon securing your new home loan. The availability of these incentives may vary depending on the specific bank or lender you opt to switch to.
For those interested in delving deeper into the intricacies of home loan refinancing, further insights are available below.
Exploring the Advantages of Home Loan Refinancing
Deliberating on the reasons for refinancing your home loan is prudent, as it can unlock numerous potential benefits. Refinancing your home loan offers the potential to:
- Realise savings through lower interest rates or reduced fees.
- Reduce your monthly mortgage payments.
- Access additional funds for home improvements, investments, or acquiring a new vehicle.
- Achieve payment stability by choosing a fixed-rate home loan.
- Simplify your financial responsibilities by consolidating multiple loans.
It’s worth noting, however, that refinancing often involves extending the loan term; this could lead to increased interest payments over the loan’s lifetime.
Once you clearly understand your objectives, you’ll be better equipped to ask pertinent questions when evaluating potential lenders and selecting the loan that best aligns with your needs.
Conducting thorough research before submitting your application will significantly contribute to your ability to make informed decisions that yield long-term benefits and allow you to reap the rewards of your financial choices.
Refinancing Your Home Loan and Key Considerations
Understanding Your Current Financial Situation:
Before embarking on your quest for a new home loan, thoroughly examining your current financial standing is wise. Consider the information a lender typically requires during the application process, including assessing your property’s current valuation. This evaluation can assist you in determining whether the present moment is suitable for refinancing. Remember that when you apply for a home loan refinance, your lender will evaluate your capacity to meet repayment obligations, considering your financial details, industry standards, and expectations.
What Lenders Look For – The Three ‘Ps’ of Lending:
Lenders typically focus on three key factors, often called the ‘Three Ps.’
Purpose: Understand the primary motivation behind your desire to refinance. Are you seeking improved interest rates or additional features? This information empowers the bank to recommend the most suitable features and product(s) per your objectives while evaluating the associated risks.
Person: Assess your likelihood of repaying the loan. Lenders rely on credit reports to make informed decisions about extending credit to you and the associated terms. Review your credit report thoroughly to ensure accuracy and completeness. It includes personal identification details, credit applications, credit cards, outstanding debts, loans, repayment history, instances of defaults, bankruptcies, debt agreements, and credit infringements. Check for inaccuracies or omissions and rectify them before proceeding with your refinancing application.
Payback: Determine your financial capacity to manage loan repayments and understand the bank’s safeguards for potential loan recovery. Ensure you can handle the additional payment responsibilities, especially if your loan payments are increasing.
Here are some other factors Lenders Consider:
Loan-to-Value (LVR) Ratio:
Typically, lenders cap their lending at 80% of your home’s value, known as the Loan-to-Value Ratio (LVR). This safeguard helps cover selling expenses and potential market value declines in the event of a loan repayment default. Calculate your LVR by summing up your total secured loans, dividing by your property’s current value, and multiplying by 100.
Deposit (or Equity):
If your Loan-to-Value Ratio (LVR) exceeds 80%, paying for Lenders Mortgage Insurance (LMI) may be necessary to protect the lender in case of non-payment of the loan. Purchasing LMI can also lead to an increase in the interest rate.
Increasing Your Loan:
Refinancing home loans with a new lender can provide access to additional funds for home renovations or installing a qualified solar power system. However, loan approval depends on your financial situation and the lender’s criteria.
Comparing Home Loan Options
Now that you understand your refinancing objectives, it’s time to explore your possibilities.
Reach Out to Your Current Lender:
Consider contacting your current lender and sharing your intentions and reasons for refinancing. This proactive approach might lead them to offer improved interest rates or loan terms that align with your preferences.
Comprehensive Research:
If you are determined to proceed with refinancing elsewhere, now is the ideal time to conduct thorough research. Create a comprehensive list of the advantages and disadvantages of the new loan compared to your existing one. Here are some terms to assist you in this evaluation:
Loan Options:
Most lenders provide various home loan options with different features and promotions. These may include owner-occupier and investment home loans, basic home loans, standard variable loans with offset accounts, fixed-rate loans, construction loans, and bundled packages with promotional discounts.
Loan Term:
Consider the duration of your loan term. Suppose you refinance with the same loan amount for a longer term. In that case, your monthly payments may decrease, but be mindful that this could result in paying more interest over the life of the loan.
Introductory or Honeymoon Rate:
Some loans offer an initial reduced interest rate for a set period, usually 1 to 2 years. Ensure you thoroughly examine all interest rates, especially comparison rates and associated fees, to determine if this offer is advantageous.
Interest Rate Types:
Different home loans come with various interest rate structures, including variable interest rates, which can change with market conditions, and fixed interest rates, which remain constant for a specified period.
Comparison Rate:
Use the comparison rate to assess the true cost of a loan, considering not only the interest rate but also applicable bank fees like establishment and service fees. Remember that the comparison rate does not include government charges and early payout fees.
Fees:
Make sure you keep an eye out for home loans that come with service and admin fees. Also, take the time to understand the break costs associated with repaying fixed-rate loans before the fixed term ends and discharge fees for when you have fully paid off the loan.
Valuation Fee:
If the new lender needs to assess your property’s value, they may arrange an independent valuation.
Repayments:
The loan amount, term, and interest rate determine the repayments for the loan. Opting for longer-term results in lower monthly payments may also increase interest costs. Evaluating whether you can pay extra to reduce the loan term would be best.
Features:
Some features can save you money over the life of the loan:
- Offset Account: An Offset Account is a transaction account. It is linked to your home loan and used to reduce the loan balance and interest.
- Redraw Facility: Allows you to access extra repayments made on your loan when needed.
- Repayment Holiday: You can suspend loan repayments if paid extra.
- Split Loans: Divide your loan between variable and fixed interest rates.
- Portability: Transfer your loan to a new property without changing loan arrangements.
- Other Products or Services: Consider discounts on products like transaction accounts, credit cards, and insurance offered by the new lender.
When comparing lenders, evaluating all options, including interest rates, fees, charges, and incentives for switching, is crucial. What initially appears as an attractive deal may not hold up under scrutiny.
Choosing a Lender for Your Loan Refinancing:
When it comes to choosing a lender for your home loan refinance, there are three primary methods to compare your options:
One: Enquire Directly
Approach each lender online, over the phone, or in person. Ensure they possess a valid Australian Credit Licence.
Pros:
- Direct interaction with the lenders you’re interested in.
- Access information directly from the source.
Cons:
- It is a time-consuming process as you deal with each lender separately.
- You may lose the potential to take advantage of better options from other lenders.
- As a borrower, it can be challenging to understand the terminology different lenders use.
Two: Using Comparison Sites
Utilise comparison websites where you can. Search for sections or keywords related to your refinancing objectives. These sites are typically present product features in tables organised by lenders, making comparing similar features and fees easier.
Pros:
- Timesaving, as these sites simplify the comparison process.
- Exposure to lenders you may have yet to consider.
- It can allow borrowers to sort lenders based on their criteria.
- Access to articles and glossaries for assistance.
Cons:
- The site only features lenders who pay to be listed.
- It can cause you to miss out on better options from other lenders.
- Possibility of outdated information.
- Recommendations may only be partially impartial if certain lenders pay the site more than others.
Three: Going with a Mortgage Broker
You should engage a mortgage broker to tailor various options according to your plans. The broker will handle your application and interact with lenders on your behalf, which is a key advantage. Your broker will receive commissions based on your loan size and the home loan duration.
Pros:
- Allows direct communication with the broker, simplifying the lender comparison process.
- It can let borrowers identify lenders they might have yet to consider.
- Brokers are proficient in deciphering banking terminology and translating it for you.
- Knowledge of the information lenders require and how to complete application forms.
Cons:
- May only consider some lenders and home loan options in the market.
- There is a potential need for objectivity if the broker receives higher commissions from one lender than others.
Each approach has merits and drawbacks, so selecting the one that best aligns with your preferences and needs when refinancing your home loan is essential.
Applying for a New Home Loan
After researching and identifying the eligible home loans and terms that align with your plans, it’s time to initiate your application. There are three primary methods to apply for a home loan: online application, using a mortgage broker, or visiting branch lenders. To secure approval, you must furnish your information and supporting documents for the lender’s assessment.
Details You’ll Need to Provide:
Personal Details:
Typically, each applicant is required to provide.
- Name
- Age
- Address
- Contact Information
- Two Forms of identification. (e.g., Australian driver’s license, passport, Medicare card, Australian Birth Certificate).
Providing personal details ensures the lender deals with the correct individuals and can easily contact you. Some lenders may offer secure online ID verification options. Additionally, you’ll need to specify the duration of your current and previous residential addresses.
Family Situation:
Your relationship status and the number of dependents you support. These details may impact your income and expenses, influencing the loan approval process.
Employer:
To ensure smooth loan approval, providing comprehensive information about your employer, such as business details and contact information, is important when ensuring loan repayment over a prolonged period. Providing employer details establishes your employment stability and income, which are critical factors lenders consider. It’s best to provide clear information.
Earnings:
Provide detailed information about your current expenses, which bank statements, copies of bills, and other relevant documentation for verification purposes should substantiate.
Expenses:
You will need to provide detailed information about your current expenses. A broker can verify expenses using bank statements, copies of bills, and other relevant documentation.
Assets:
Documentation showcasing valuable assets you own, demonstrating your ability to repay part or all the loan. These assets could encompass property, investments, vehicles, home contents, or collectibles. The lender may request supporting documents to assess the value of certain assets.
Liabilities:
A comprehensive list of debts you owe others, immediate or future repayments, is required. Liabilities may include existing home loans, investment loans, credit card balances, personal loans, car loans, and more. Supporting documents confirming the owed amounts and repayment arrangements are essential.
Details of Your Current Loan and Property:
For your new lender to pay off your existing loan and facilitate the transfer of property deeds and the mortgage, it is important to provide sufficient information. Once your lender receives these details, they will seek your consent to conduct a credit check to confirm that your financial records match your provided information. This thorough assessment is a crucial step in the home loan application process. After refinancing, you must use your accounts to make your new repayments.
Finalise Your New Home Loan
Loan Approval and Settlement
Upon approval, your new lender will send you the necessary mortgage documentation for your new home loan contract. Like any contract involving substantial financial transactions, it’s advisable to seek professional advice from an independent legal specialist before signing. Even after seeking legal advice, ensure you can completely comprehend the terms and conditions outlined in the document. If there are any uncertainties, do not hesitate to seek clarification.
Once you’ve reviewed and are comfortable with the contract, sign it. Subsequently, your new lender will typically handle paying off your previous lender and facilitating the transfer of the mortgage and any other associated accounts involved in your refinancing. Note that delays from your old lender can impact your loan settlement date.
Once these steps are complete, you will receive a welcome kit from your new lender. This kit will detail the agreed-upon interest rate and repayment terms. It’s crucial to review this information to ensure its accuracy thoroughly. Once confirmed, you can set up your accounts to meet your new repayment obligations.
Congratulations, as you’ve now completed the refinancing of your home loan!