In Australia, the average length of a home loan lies somewhere between 20 to 30 years. Within that time period, a lot of things can change. Your job might change, your living conditions might change, and the interest rate might see significant hikes and drops.
Because of this you’re likely not going to have the same loan by the end of your initial term. If your finances have changed, it only makes sense to change the terms and features of your home loan to suit your current circumstances.
A few years into your home loan, you should be looking to lock in a better rate and secure better loan terms. To do this, you will need to refinance.
Whether you’re a new homeowner or someone who is looking to secure their first investment property, it’s good to have a solid understanding of home loan refinancing.
In this article, we will explore the concept of refinancing in depth. We’ll cover what it entails and the steps involved in the process. Furthermore, we’ll discuss the key factors you should consider when deciding to refinance your home loan.
What Is Refinancing?
Refinancing is the process of reviewing and improving the terms and features of your current home loan. You can refinance with your current lender or you can switch to another lender thatoffers better benefits.
The main goal of refinancing is to make your loan more suitable to your current living situation. You might want to refinance to:
- Lock in a better interest rate
- Shorten your loan term
- Change into a split rate home loan
- Consolidate your debt
- Switch to an interest only or fixed rate home loan
- Pay off your loan faster
- Convert your home equity into cash
You can refinance with a mortgage broker or you can go directly to the lender. Working directly with a lender might give youfreedom of choice. On the other hand, working with a broker will save you a lot of time and effort. If you’re running a business or if you’re taking care of a family, this can be a great way to avoid additional stress.
Furthermore, brokers tend to have more access to a variety of loan options across a number of different lenders. They might be able to give you access to an option that may otherwise not have been available to you.
Things To Consider Before You Refinance
Before you commit to anything, it’s important to pause for a moment and think about thepossible consequences of refinancing. Just like with any other financial endeavour, a careless oversight can lead to a whole slew of problems.
Here are a few things to consider before you decide on a refinancing option:
- Any upfront or ongoing costs
First and foremost, it’s important to know that refinancing isn’t free. Though the costs will differ depending on the lender that you go with, there are a few common fees that you should expect.
- Break costs
- Application fees
- Discharge settlement fees
- Valuation fees
- Mortgage registration fees
You also need to think about the ongoing costs that you have to manage after you refinance. Think about how you’re going to deal with your current promotional rate and how your finances will change after your loan reverts to the standard rate. You should also think about whether or not you’re going to keep your current repayment amount.
- Current interest rate
The rates that the lenders set is generally influenced by the official cash rate set by the central bank. In the case of Australia, it’s the Reserve Bank of Australia that sets the cash rate.
Generally speaking, when the interest rates are low, it’s a good time to refinance. That being said, interest rates can quickly hike up in just a few months. Because of this, you need to make sure that you’re keeping up with the financial news so that you have a better sense of where the rates are going.
- Your credit score
Before applying, make sure that your credit rating is good enough to refinance your home loan.
If your credit score isn’t where you want it to be, you likely won’t be able to get the terms and conditions that you want. In some cases, you may not even be able to refinance at all. If you get rejected for a refinance a few times, it will likely affect your credit score.
- Your reason for refinancing
Last but not least, you need to take the time to think about the reason you want to refinance. Knowing exactly what you want to achieve will allow you to determine which home loans are right for you. Additionally, having a concrete goal will make the process easier for you and your advisors.
Do you want to pay off your loans faster? Are you looking to renovate your home and want a cash out refinance? Whatever your aim might be, make sure to define it as clearly as possible.
How To Refinance Your Home
At its core, refinancing is a relatively straight-forward process if you know what you’re getting into. However, since there are so many things to consider, new homeowners can easily become overwhelmed without the proper guidance.
To make things easier here is a short summary of the refinancing process:
- Knowing your options
Evaluate the different refinancing options that are available to you and select the one that most suits your current circumstances. The main factors to look out for are the interest rates, comparison rates, loan terms and the repayment frequency. You should also look at loan features such as offset accounts or redraw facilities.
If possible, get the assistance of a financial and legal advisor to ensure that you fully understand the products that are offered to you.
- Gather documents
Gather all the necessary documents that the lender needs for the loan application. This includes different forms of identification, bank statements, pay slips and so on. You will also need to provide you lender information about your living conditions, employer, expenses, assets, debts and any other existing loans that you may have.
- Underwriting and appraisal
Underwriting is the process of verifying your income and other financial information that you’ve provided the lender. The lender will make sure that the details that you’ve submitted are accurate and up to date. This step also involves an appraisal of your home’s current value.
The underwriting process is crucial as it will determine what refinancing options will be available to you. For example, how much money you will get from a cash out refinance will depend on your home’s value.
If you want your home to be well-prepared for the appraisal, make sure to finish up any on-going projects. This could be minor repairs, re-painting jobs and so on. Of course, it’s also important to make sure your space is tidy and organised.
- Closing on the new home loan
Once the terms of the new loan are settled, your lender will send you a contract to sign along with any other relevant documentation.
Once again, it’s absolutely important to hire financial and legal advisors to help you understand the contract. If you have any concerns or questions about the terms and conditions, make sure to ask the lender and your advisors.
Hopefully, this short guide has helped you gain a better understanding of home loan refinancing. Whatever your goals might be, it’s important to take things slow and make sure you’re thinking each and every step through. With the proper guidance and the right mindset, you could end up with a great deal at the end of the process.