A step-by-step guide to refinancing your mortgage

By Mark Rosanes

Refinancing your mortgage to a lower interest rate can work wonders for your financial future that extend beyond just saving money in monthly repayments. But it also entails an often tedious and complicated process, which requires ample planning and preparation.

Earlier, Your Mortgage gave you the answers to commonly asked questions about refinancing your home loan. We will now give you a rundown of the steps you need to take to reap the full benefits of this strategy.

Step 1: Identify your reasons for refinancing

The first thing you need to do is ask yourself if refinancing is the best move for you at this point of your contract. Many experts believe that now is a suitable time for borrowers on fixed-term contracts to refinance their mortgage, especially with interest rates hitting record lows.

Here are some situations when refinancing makes perfect sense:

  • Your current rate is no longer competitive and lower deals are available
  • Your property’s value has increased and you want to access your equity
  • Your financial or personal situation has changed
  • Your credit card debts have started accumulating and you want to consolidate them

However, refinancing is not for everybody. Here are some instances when refinancing is not a good idea:

  • Your break cost is too high
  • Your equity is less than 20% of the property’s value
  • Your no longer have a reliable source of income
  • You plan on selling your property

Step 2: Check your credit rating

An above average credit rating plays a crucial role in helping you access a better interest rate. The required scores often vary from lender-to-lender, but generally a minimum rating of 622 will enable you to refinancing your mortgage. The table below shows the different credit score ranges, along the chances of getting a lower interest rate:

Credit score

Chance of getting lower interest rate

Excellent (833 to 1,200)

Easy access to better interest rate, along with more refinancing options

Very good (726 to 832)

High chance of getting a lower interest rate

Good (622 to 725)

Good chance of getting a lower interest rate

Average (510 to 621)

Lenders will need to evaluate applicant’s financial situation

Below average (509 and below)

Refinancing not advisable, usually interest rates are very high if approved

Step 3: Know how much your property is worth.

When planning to refinance, it is vital for you to have a realistic idea about how much your property is worth. You can do your own research about recent sales of similar homes in your neighbourhood or you can ask your local real estate agent to do the calculation.

Step 4: Compare interest rates

You can shop around for better interest rates by comparing what different banks, credit unions, mortgage companies, and loan brokers have on offer. You can do this online by visiting various financial comparison sites, including Mozo, Finder, and Rate City. If you decide to move on to another lender, make sure that the loan offers a better rate and has the features that matches your financial situation.

The table below shows some of the top lenders for mortgage refinancing based on Mozo’s 8 January figures:

Lender

Home loan

Interest rate

Loans.com.au

Smart Booster Home Loan

(1-year discounted variable rate, owner occupier, principal & interest, <80% LVR)

1.99% p.a.

(variable for 12 months and then 2.48% p.a. variable)

UBank

UHomeLoan

(Owner occupier, principal & interest)

1.95% p.a.

(fixed 3 years)

Athena

Celebrate Variable Home Loan

(Owner occupier, principal & interest, <60% LVR)

2.19% p.a.

(variable)

Virgin Money

Special Offer Reward Me Fixed Rate Home Loan

(Owner occupier, LVR <80%, 300K+)

2.04% p.a.

(fixed 2 years)

Macquarie

Basic Home Loan

(Fixed, owner occupier, principal & interest, LVR 70% to 80%)

2.19% p.a.

(fixed 3 years)

Suncorp

Fixed Home Loan Special Offer

(Owner occupier, principal & interest, <80% LVR)

1.89% p.a.

(fixed 2 years)

Goulburn Murray Credit Union

Basic Variable Special Offer Plus

(Owner occupier, principal & interest)

2.33% p.a.

(variable for 24 months and then 3.82% p.a. variable)

UBank

UHomeLoan - Discount Offer

(Owner occupier, principal & interest)

2.34% p.a.

(variable)

Newcastle Permanent

Special Real Deal Home Loan

(Owner occupier, principal & interest)

2.59% p.a.

(variable)

HSBC

Fixed Rate Home Loan

(Owner occupier, principal & interest, LVR <80%)

1.88% p.a.

(fixed 2 years)

Athena

Liberate Variable Home Loan

(Owner occupier, principal & interest, 70% to 80% LVR)

 

2.29% p.a.

(variable)

Suncorp

Back to Basics Special

(Owner occupier, principal & interest, LVR<80%)

2.54% p.a.

(variable)

Loans.com.au

Smart Home Loan 80

(Owner occupier, principal & interest)

2.48% p.a.

(variable)

CUA

Achieve Variable Home Loan

(Owner occupier, principal & interest)

2.55% p.a.

(variable)

Yard

Variable Home Loan Special

(Owner occupier, principal & interest, LVR <70%)

2.09% p.a.

variable

Bank of Queensland

Economy Variable Home Loan

(Owner occupier, principal & interest, <70% LVR)

2.59% p.a.

(variable)

Source: Mozo.com.au (8 January 2021)

Step 5: Examine the costs

Just like when applying for a home, refinancing a mortgage involves several fees and charges. It is advisable for you to compare the amount you can save against expenses you may incur before deciding to refinance. Here are some of the extra costs that may arise if you choose to refinance your home loan:

  • Application fee for the new loan
  • Settlement fee to pay out your current mortgage
  • Valuation fee
  • Discharge fee to release you from your existing mortgage
  • Break cost for breaking a fixed-term contract
  • Mortgage registration fee for the new loan
  • Stamp duty
  • Lenders mortgage insurance (LMI)

Step 6: Apply for the loan

Before filling out your loan application, it is best to review the rates your lender has sent you. Check out the loan offer and the list of fees. If everything looks good, then it is time to submit your application.

Step 7: Get ready for a valuation of your property

The new lender will take between a few days and a few weeks to process your refinance application. During this time, the lender will arrange for a valuation of your property. If it turns out that your home is more or less than what the lender anticipated, then your loan terms could change. Make sure to review the updated loan estimate carefully.

Step 8: Lock it in

Once you are satisfied with the refinancing rate, it is time to lock it in with your lender. This prevents the rate from changing prior to closing the home loan. You also have the option to let your rate float. However, this strategy can only work to your advantage if interest rates go down before you close the loan, otherwise you may end up paying a higher rate.

Step 9: Submit the necessary paperwork

Refinancing your mortgage requires a lot a paperwork. Here’s a list of the documents you will need to prepare to refinance your home loan.

  • Driver’s license or passport
  • Pay stubs as proof of income
  • Tax returns
  • Recent credit report
  • Homeowners insurance policies
  • Statement of assets, including those for savings and retirement accounts, stocks, and bonds
  • Statement of debt, including those for your existing mortgage and car loans

Once you have completed the necessary paperwork, the new loan should be ready for the lender’s approval. The lender will then ask you to sign a closing disclosure form. Once done, you will be given your loan documents that you will also need to sign. Make sure to review all documents carefully before affixing your signature.

Step 10: Close the loan

After the loan has been approved, your new lender will arrange both settlement of your old loan with your existing home loan provider and the establishment of your new loan. This involves exchange of titles and the bank’s registration of the mortgage over your property.

Once done, your new loan is ready! Your lender should give you the details on how to manage your new loan, along with the new account information, usually within a week.

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