Best mortgages for refinancing

By Mark Rosanes

With interest rates reaching historic lows, many experts believe that the time is ripe for borrowers on fixed-term contracts to refinance their mortgages. Refinancing can yield several benefits that go beyond just saving money in monthly repayments. If done right, this strategy can also help homeowners achieve a better financial future.

How does mortgage refinancing work?

Refinancing allows borrowers to switch from their current home loan to a new one. Most homeowners choose to refinance their mortgage to obtain a lower interest, which can help reduce monthly mortgage repayments. The amount that borrowers can save from refinancing can enable them to pay off their home loan at a shorter time.

Many mortgage holders also refinance to access a home loan with flexible features, including an offset account or redraw facility, which gives them additional options in managing their payments. 

Borrowers can either refinance with their existing lender or switch to another lending institution. If they choose the latter, the new lender will pay out their existing lender with some or all the funds from their new home loan.

What are the benefits of mortgage refinancing?

Experts say that home loan refinancing is not always about getting the lower rate. Borrowers can also use this strategy to better manage their finances. Here are some of the opportunities that mortgage holders can unlock if they decide to refinance.

1. Reduced monthly repayments

Mortgage refinancing allows borrowers to save hundreds of dollars every month from their reduced repayments, so they can pay off their home loans faster. Homeowners can also put the money in their savings account or use the cash for investments or to pay other debts.

2. Access to equity

Refinancers can release equity they have built in their homes over the years. Mortgage holders can use this equity if they are planning add value to their homes by renovating or invest in a property for passive income. Borrowers can also take out a cash-out refinance for personal spending such as funding a child’s education or purchasing a family car. For a cash-out refinancing, however, homeowners need to stay within their lender’s loan-to-value (LVR) threshold.

3. Debt consolidation

Mortgage refinancing can also help borrowers manage their financial commitments and debt. If they have enough equity on their properties, homeowners can combine all their debt into one huge repayment instead of paying it off in several smaller chunks. Debt consolidation allows mortgage holders to save on interest rates and simplify their finances. 

4. Save their homes if their mortgage is in arrears

Major life-altering events such as illnesses, unemployment, or loss of a loved one can often hamper a person’s ability to meet financial commitments. Refinancing can help prevent borrowers from losing their homes if the mortgage in arrears. They can do this with a specialist lender, also known as non-conforming lender. One drawback of this strategy, however, is that it involves higher interest rates.

5. Move from a high-interest bad credit home loan to prime loan

Borrowers with a bad repayment history or too much debt can secure a home loan but often with higher interest rates. However, once they have improved their credit ratings, they may qualify for a lower-interest mortgage, which they can access through refinancing.

What are the costs of mortgage refinancing?

Refinancing a mortgage is quite similar to applying for a home loan – there are several fees and charges involved. Experts advise that borrowers consider the amount they can save against the expenses they may incur before arriving at a decision. Most of the time, however, refinancing costs are minimal compared to the potential savings they can get on lower interest rates and other fees over the life of the loan.

Here are some of the expenses that borrowers may incur when refinancing:

Upfront fees on the new loan

New lenders may charge a range of upfront fees, including loan application fee for the new loan and settlement fee that a lender may charge to pay out the current mortgage.

Valuation fee

Just like when purchasing a property, the new lender will ask a professional to perform a valuation of the refinancer’s property. The fee may be charged to the refinancer.

Discharge fee

A lender charges a discharge fee when releasing the borrower from their existing mortgage.

Break cost

Break cost applies when a borrower decides to refinance within the fixed period of the home loan. Most of the time, homeowners on fixed-term contracts face higher costs for breaking the loan. Experts advise that borrowers wait until the fixed period ends before refinancing if the break cost is too high.

Government fees

Mortgage holders who decide to refinance may have to pay state government fees to discharge their existing home loan and register the new one. They may also be charged a stamp duty.

Lenders mortgage insurance (LMI)

LMI applies if the borrower has less than 20% equity on their property, even if they had already paid it in their first home loan.

Which banks offer the best refinancing interest rates?

Home loans vary from bank to bank, and often the best way to determine which ones fit a refinancer’s financial situation is by comparing interest rates, loan features, and mortgage repayment terms.

Some experts say that most lenders reserve their most competitive interest rates for those refinancing with equity on their properties. This is the reason why it is advisable for borrowers to review their home loans every couple of years to check if they are still getting the best deals.

Mozo.com.au has recently revealed some of the top lenders, including banks, for home loan refinancing. These figures are based on the online comparison site’s 6 January data.

Lender

Home loan

Interest rate

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)

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)

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, LVR 70% to 80%)

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)

Source: Mozo.com.au

When is refinancing not advisable?

One of the biggest benefits of refinancing a home loan is saving money. However, there are certain instances when refinancing costs more. Here are some situations when mortgage refinancing is not advisable.

Exorbitant break costs

Borrowers pay fees if they opt to refinance within the fixed period of the home loan. Sometimes, the cost of breaking a fixed rate is too high. In cases like this, it is better for homeowners to wait until the fixed period expires before deciding to refinance.

Equity is less than 20% of the property’s worth

Even if they already paid LMI on their first home loan, refinancers may be required to pay the insurance again if they need to borrow more than 80% of the property’s value. Just like when purchasing a home, LMI is often one of the biggest expenses when refinancing. The high cost of LMI sometimes defeats the purpose of refinancing.

Current rate is comparatively low

If the current rate on the home loan is comparatively low, there is no benefit to refinancing. Borrowers may, in fact, incur more costs when discharge fees and other upfront costs are factored in.

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