Home Loan Refinance Guide

The goal of refinancing your mortgage is to replace your existing or outdated loan with a home loan that offers you better terms - both interest rates and loan structure flexibility.

As time passes, change is the one thing that is inevitable. When your circumstances change and as your goals evolve, the home loan that was perfect for you when you bought your property might no longer be the best fit. By comparing your mortgage options, you can make an informed decision to switch to a home loan that suits you better, or whether you are better off keeping the mortgage you have.

Evaluating your current Home Loan

There are 3 key things that you should know about your home loan.

  1. What are your monthly repayments?
  2. If you can't remember exactly what your mortgage payments are each month, now is the time to find out. If your income has increased, you might be able to easily pay back a little more. Do you know if your home loan allows you to do this?

    Knowing what you are paying towards your mortgage, and how long you have left on your home loan term is the first step to improving your financial position.

  3. What is your current interest rate?
  4. In December 2014, a survey of Australian home owners revealed that almost 1/3 of Australians don't know what their home loan interest rate was. It's good to check on it every 3 years or so - a home loan isn't like other products you purchase. The value of a home loan isn't fixed. When the interest rates change, the total cost of your home loan changes.

    Unless you fix the rate for a certain period, your interest rates may increase or decrease over time.

    If there's an interest rate decrease, you want to take advantage of this, as it will mean lower repayments and the ability to pay off your loan faster by paying more than is due. When the lending market is highly competitive you can also get lower interest rates and home loans with more features and lower fees.

  5. Do you know what the features and fees of your mortgage are?
  6. Using the 'comparison rate' advertised by lenders, you can quickly and easily compare different home loans and their true costs. The comparison rate is calculated to reflect both the interest rates and fees that apply to a home loan.

    It's important you know when certain fees are applied to your loan. If you want to make extra repayments or redraw on your loan, how much will it cost? Is it a recurring fee each time, annual, or one-off fee which lets you pay extra or redraw as often as you like? Knowing the answers to these questions could save you a lot in the long run.

    Generally speaking, a home loan with more features and flexibility will attract a higher interest rate. If you aren't using the features of your home loan, you might save up to $100 per month by switching to a simpler loan with a lower rate.

Refinancing a home loan

Refinancing your home loan means that you pay out your current home loan by taking out a new mortgage. The new loan can be with an existing lender, or through a different bank or lender.

When you refinance, the lender will reassess your financial situation to make certain that you can easily afford the repayments on the new home loan you apply for.

When you refinance, the title deeds of the property will be transferred to the new lender, who will pay out your old mortgage on the home loan settlement date. Your new lender will lodge a 'Discharge of Mortgage' document with the Land Titles Office. After this date, you won't make any more payments on the first mortgage, and you'll start making the repayments on the new home loan you've chosen.

If you refinance through a mortgage broker, they will take care of all the negotiations, application forms and requirements of switching your home loan.

When should I consider refinancing?

It could be a good time to make an appointment with a mortgage broker for a home loan review if:

  1. It has been 3 years or more since you reviewed your mortgage and interest rates.
  2. You want to add value to your home by renovating.
  3. You would like to consolidate your debts into one place with a low-interest rate.
  4. You are looking to buy a second property as an investment, and you want to use the equity in your home as a security deposit.
  5. You would like to be able to use the equity in your home to pursue personal goals, such as sending your children to a particular school.

If you don't have much time to spare to look into your mortgage, you can get a free professional evaluation. A mortgage broker will make a time to visit you whenever it suits you. They deal with home loans every day, so they stay up to date with what's available on the market. Your mortgage broker will be able to advise you if it's going to be worthwhile refinancing, or whether the loan you already have has the best rates and features at this stage.

Here are some situations where it might not be beneficial to refinance:

  • If your Loan to Value Ratio (LVR) is over 80%. If you own less than 20% of your property, you'll need to pay Lender's Mortgage Insurance all over again.
  • If you've fixed your interest rates. At the end of the fixed rate period is generally the best time to reassess the home loan. If you refinance during the fixed rate term, you will probably need to pay the break cost fee.

How Much Will Refinancing Cost?

There are costs involved with refinancing a home loan. When you decide whether it's worth your while to refinance, get your mortgage broker to calculate how long it will take to recover these costs with the savings you can make after the home loan switch.


Case Study

Sam has a home loan with a 30-year term for $400,000, and his interest rate is 4.9%. His loan repayments are $2,123 each month. He can refinance to get an interest rate of 4.3%, and the fees for refinancing come to $1,200. His monthly repayments on the new home loan will be $1,979. Based on this, Sam will recover his costs of refinancing within 6 months. For Sam, this is a smart move, and he can look forward to lower repayments, or opt to pay back his loan sooner with extra payments.


You'll want to recover your costs within 12-18 months. If it'll take a few years, it's probably not worthwhile.

Costs that you'll have to pay when you refinance

  1. Borrowing costs: these will vary from lender to lender, and can include:
    • Loan application fee
    • Valuation fee: the bank will need to have your property value assessed by a valuer
    • Settlement fee: the fee for paying out your current mortgage
  2. Lender's Mortgage Insurance: if you are borrowing more than 80% of the property value, you pay a one-off fee for insurance, in the place of a deposit. This protects the lender from loss if you default on your loan, and the sale of your property doesn't cover the outstanding loan balance.
  3. Stamp Duty: You'll have to pay stamp duty when you refinance. This amount is calculated based on the size of your loan and varies from state to state. You may also pay a Mortgage registration fee.
  4. Break costs: a fixed rate home loan could have costs for ending the fixed term early.
  5. Exit fees: If your loan was settled after 1 July 2011 you won't pay exit fees when you refinance. If you took out your home loan before this date, the fee you pay will depend on your loan balance, and how long you've held the home loan for.
  6. Mortgage discharge fees: These fees cover the bank or lender's costs to attend settlement and finalise your home loan.

Protecting your Property - do you have the right Insurance?

When you refinance is a good time to review your income protection and Home and Contents Insurance to make sure it's still appropriate for what you need.

If you haven't thought of life insurance in the past, it's also a good opportunity to review your personal situation and decide whether this will be worthwhile. Having the right insurance means you protect your home or investment, and continue to provide for your family if the unexpected occurs.

INCOME PROTECTION

Income protection insurance is there to fill the gap if you are unable to work. It can replace up to 75% of your income, plus superannuation contributions. This means that if you are in an accident or become ill, and you are unable to work, you do not have to worry about how you will meet your mortgage repayments and other financial commitments.

Income Protection can be held within your superannuation. Premiums are tax deductible, and you do pay tax on any payments you receive.

Payments under income protection insurance are paid when:

  • you're unable to do at least one of your important duties,
  • unable to work more than 10 hours per week,
  • or unable to earn more than 20% of your income.
LIFE INSURANCE AND TRAUMA COVER

Life insurance is included with your superannuation, but the amount available decreases as you get older. It's a good idea to check with a financial planner if this is going to be adequate to cover your family's needs, and to make sure you have the right policy for your situation.

Trauma Cover is a lump sum payment if you're diagnosed with one of 44 specific medical conditions, and you survive 14 days from diagnosis. It can be held alone or with either income protection or life insurance. It's paid regardless of whether you're still able to work at this time.

If you'd like a free consultation with a financial planner to review your current insurance needs, call us on 1300 366 287 and we will arrange a time with our in-house financial planner.

Ready for more Information?

To get a clear picture of your position in just one consultation, a mortgage broker will need some information from you. This will include:

  • Proof of your income
  • Statements for the recent 6 months of your existing home and personal loans
  • Any recent strata notice
  • A recent Council rates notice
  • The building insurance policy for your property.

If you're ready to book an appointment, it's as easy as contacting a local mortgage broker. You can also complete a mortgage health check request, and our mortgage brokers will get in touch at a time convenient for you, or call 1300 366 287. At Positive Home Loans we can help anyone Australia-wide to realise their home ownership dreams.

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