For homeowners who have been paying their mortgages for years now, there is a likelihood their financial situation and the dynamics of the property market have changed since they first took out their loan. When this happens, borrowers often refinance to better adapt to their current situation.
Here’s everything you need to know about refinancing.
What is refinancing?
Refinancing is a term used to describe the act of turning over the mortgage to a different lender or institution or changing to another loan product. It is an option available to most home loan borrowers who want to access new loan features, get a more competitive interest rate, or consolidate their debts for convenience.
Refinancing can be internal, which is when you switch to a new loan product from your current lender. An example of this is when you switch from a variable-rate mortgage to a fixed-rate one.
On the other hand, you can also consider external refinancing. This happens when you move your loan to another financial lender who might have a better offer or could provide you with features more suited to your needs.
Is refinancing right for you?
Think of refinancing as a chance to review your current finances in the hopes of getting the most value for your money. When you refinance, you will be able to optimise your finances to better suit the current market trends and your personal circumstances.
There are many reasons why you may consider refinancing. For one, you might have found a better offer from another financial institution – perhaps one with a better interest rate and relevant features.
Refinancing is also an attractive option if you are planning to use the equity in your home to make other purchases, such as buying a car, investing in your child’s education, or renovating your home. It's important to note, though, that the amount depends on the lender's valuation of the equity in your property.
You can also go this route if you are looking to consolidate your debts. Pooling together your debts into a single credit facility (in this case, your mortgage) could reduce your debt obligations.
How do you start your refinancing journey?
Before making any decisions to refinance, consider your current financial situation along with your goals for the next three to five years. This is the best way to prevent the need to refinance again in the near future.
Step 1: Determine what you need and explore your options
One of the keys to making a refinance work is not only reducing repayments via lower rates in the short term but also ensuring these rates will be competitive for the next five to 10 years as well.
You will need to list down your home loan must-haves and compare your current deal with that list to see if it really falls short of your expectations. Some of the things you need to consider are:
- Competitive rate
- Flexible features
- Minimal to no ongoing fees
- Good customer support and service
You can also browse some of the best refinancing deals in the market here: Compare refinance home loans
Step 2: Discuss with your lender or broker
After you’ve decided what you want out of your new home loan, approach your existing lender to see if they can offer a better deal. If you’ve got a no-fuss history, your lender might go to unexpected lengths to keep you, such as offering an ultra-low interest rate and waiving fees. If this happens make sure you get all offers in writing so you can use this information against your home loan comparison of the market later on.
If you engage with brokers, their first stop is working out whether you can reduce exit and entry costs by facilitating the refinance with your existing lender and pulling a few strings there. Brokers tend to have significant numbers of customers with each lender and they know how far they can push to avoid you having to switch lenders altogether.
Step 3: Apply to refinance
The refinancing process is similar to when you applied for finance the first time around unless you’re refinancing with the same bank – in which case, you won’t need to provide as much paperwork.
However, if ever you fall into the following circumstances, you will need to undergo another assessment from your chosen lender to see if your finances fit the requirements of your target loan product:
- Your credit record has been impaired
- Your income stream has changed
- Your liabilities have changed
- You have no equity in your property
As much as possible, attempt to pay off as much personal and consumer debt as you can and reduce your credit card limits to manageable levels.
Step 4: Get finance approval
If you are applying for a new lender, it may take a few days or weeks before they can process your application.
Your new lender will arrange to value your property or properties if you have more than one. Generally, the first valuation is free, but the lender will often charge $200–$300 for valuations on any additional properties.
After this, your lender will advise you in writing of your loan approval – this is generally called formal or unconditional finance approval. Your broker or lender will then instruct a solicitor to prepare the loan documents on their behalf.
Step 5: Arrange settlement
The loan documents will be sent to your solicitor for review, and for you to sign. Alternatively, you can go over the contracts yourself, thoroughly reading the specifics about your individual mortgage arrangement.
Your new lender will arrange both settlements of your old loan with your previous home loan provider and the establishment of your new loan. This involves the exchange of titles and the bank’s registration of the mortgage over your property.
You now have a brand new loan! You should receive details on how to manage your new loan, along with all of your new account information, within a few days.
Collections: Refinance home loans