These are the Important Things to Consider in Refinancing your Home Loan


Refinancing a home loan involves the process of replacing your existing mortgage with either a different home loan product from the same lender or switching to a new lender completely.

At this moment, customers are in the process of evaluating whether there are any superior offers available in the market. In Australia, it is quite common for people to refinance their home loans, particularly when there are changes in their financial objectives or requirements for a specific home loan product.

After the process of buying property in Melbourne, there are a lot of customers now asking how to do mortgage refinancing and there are many reasons why people refinance. It could be that they are as simple as seeking a more favourable interest rate, cashback, product features, service, release equity, the expiration of a fixed rate, etc.

Regardless of the reason, our brokers are equipped to assist in finding a suitable loan product or new lender that aligns with their specific needs and objectives. And they can help you understand mortgage rates. 

It is advisable to carefully consider the advantages and disadvantages before proceeding with the refinance. This includes evaluating the expenses you will incur and any potential costs that may arise due to the terms and conditions of your existing loan.

Refinancing our home loan can be either internal or external refinancing. That’s why we need to check our primary purpose for refinancing.

 These are the Refinance Costs you might need to Pay

  •   Discharge fee
  •   Break costs
  •   Application Fee
  •   Mortgage Registration Fee
  •   Lenders Mortgage Insurance (LMI)
  •   Settlement fee 

Discharge Fee

Since you will be leaving the lender and they must take care of the paper works, they will ask for a discharge fee. Normally this fee ranges from $350 or more.

Break Costs

Repaying your loan ahead of schedule is not always needed as you may have to pay the break costs.

You need to pay for this as it may cause a financial loss to the lender. One of the things you have to check for your loan is if it’s a fixed rate. However, some lenders have a threshold per year that permits you to pay more than your regular repayment. 

So, if you are deciding to refinance, this is something you may want to check first. This cost normally happens if you:

*Pay off the loan earlier than your agreement

*Refinance with another bank 

*Switch to a variable rate or interest rate only

While some banks do not make exceptions for break costs, in situations of financial hardship, certain lenders may be willing to adjust. 

Application Fee

Since refinancing is considered as opening a new loan, lenders ask for a fee to start the process of the application. This fee ranges from $150 or more. 

Mortgage Registration Fee

Since we are moving to a different lender when we refinance, we’ll have to register our mortgage with the new lender. This fee varies depending on the States.

Lenders Mortgage Insurance (LMI)

When you are applying for a home loan, including refinance, LVR is something to keep in mind. LVR (Loan- to- value ratio) is the amount of the loan or the money available for deposit represented as a percentage of the value of your property. To get your LVR, the simple formula is,

LVR = Total Loan Amount   x 10 /  Property Value

It is better to have a lower LVR and or at least 80%. Because if your LVR is greater than 80%, that is when you may have to pay LMI.

Some banks will accept more than 80% LVR if you pay for LMI. LMI is the insurance or the one-time payment that the borrower must pay in case of loan default or the borrower’s inability to repay their home loan. This is simply giving protection to the lender against any potential financial risk.

Normally, you will have to pay a higher LMI if your LVR is higher. You can talk about this with your broker to give you some advice.

Settlement Fee

To settle the loan there will be representatives and cost to arrange the settlement. This fee should be paid to your new lender.

Advantages and Disadvantages of Refinancing

Advantages

  • Lower interest rate
  • Change Lender
  • Reduce the term of the loan
  • Change Loan Type

Lower Interest Rate

There is big competition in the market, and the lenders will try to retain and gain new customers. That means your existing bank or lender will give you a lower interest rate than the current one to keep you with them.

In cases like fixed to variable rates, you can ask them to give you a lower revert rate. And they might accept lowering the interest rate in order to retain your loyalty.

Change Lender

If your needs and expectations are not met by the current lender, you can switch to a different lender. 

You will get to select the right lender with the appropriate product for your needs and objectives. 

Reduce the Term of the Loan

Suppose you want to pay your loan early, like from 30 to 25 years. This action can turn into a higher monthly repayment. Ensuring the stability of your monthly repayment is important.

If any changes in your financial circumstances can affect your repayment, then think twice. But this also helps you save on interest. 

Change Loan Type

The home loan you have right now is variable, and you want to change it to a fixed one for stability. If you are doing a refinance, you can request to change it.

 Disadvantages

  • LMI
  • Costs

LMI

As previously discussed about the LVR, most lenders will require you to pay for this to mitigate the risk of the home loan default.

Costs

As mentioned earlier, it is important to keep in mind the associated expenses that may arise if you decide to pursue refinancing. These costs may include break costs, discharge fees, application fees, and more. Understanding the details of your current loan can provide you with an advantage in assessing the potential costs involved.

Cashback

Customers are drawn to refinance their home loan to another lender because of Cashback. Lenders employ more than simply interest rates to persuade customers; they also provide cashback opportunities.

Most lenders who offer cashback will first examine your LVR and need a deposit of at least 20% to say that you’re eligible.

Typically, the bigger the loan amount, the higher the cashback. Depending on the lender, their cashback offer could be worth $2,000 or more.

Cashback is a lender’s strategy to attract the customers’ attention and encourage customers to choose them. In this tough market competition, they want to ensure they retain and attract new customers. However, this offer is usually for new ones who would like to refinance their home loans. 

To keep the excitement of the Aussie’s home loan and to ensure immediate response from customers, banks have set an expiration date on this offer.

 

Which Home Loan Product to Choose?

When choosing a financial institution to refinance with, you should also check whether the product is good enough to meet your goals and objectives. Banks have different products, like the basic home loan and the package one.  The features and benefits of these products are different, and you must also consider that before selecting your best home loan product to refinance. You will find that the product may not have the shifting feature you need.

For this reason, you need to communicate with your broker your need for a specific product feature, like an offset feature, and your goals and objectives to give you the suitable product options, like with a low-interest mortgage.

 

Most customers prioritise the value of having Redraw facility and Offset account. 

Redraw is the product feature that enables you to access the extra payments you made on your home loan.

There are some lenders who have no fees to redraw, and each lender has their policies when using it. Before making any changes, lenders typically verify the account holders to determine whether the process can be done online or requires a visit to the branch.

An Offset Account is the account that links to your home loan. This is like a transaction or savings account. The balance of this account offsets against the amount owing on your mortgage. This can help you lessen the interest that you pay for your mortgage.

Lenders’ home loan products normally have both of these features. But not all products have both, which is why when refinancing your mortgage, it is important to let your broker know your specific requirements. This will allow them to assist you in finding a product that possesses these features and meets your other needs.

Asking questions from refinance experts is a helpful way to get to know the process. It is also recommended to ask for mortgage broker advice to understand home loan strategies and to learn about loan approval tips.