Refinancing is a valuable and necessary part of mortgage ownership.
When you've had a home loan for a few years, your life will undergo many changes during that time. Whether you’ve got a promotion, changed careers or started a family, your financial circumstances evolve as you do.
Refinancing allows you to adapt to these changes and get a home loan that works for your current needs and goals. Equally important, refinancing helps borrowers avoid paying a ‘loyalty tax’ to their current lender and ensures they are still getting the best rate and deal on their mortgage.
Sadly, many borrowers are unaware of the benefits of refinancing and don’t want the hassle of renegotiating their home loan. But this process doesn’t have to be complicated.
Below you’ll find a complete guide to refinancing from our experienced mortgage borrowers.
What is refinancing?
Refinancing is the process of replacing an existing home loan with a new home loan that is more beneficial to the borrower’s interests. This can mean either negotiating a better rate and terms with the current lender or switching lenders for a better offer elsewhere.
Why would a borrower want to refinance?
The main reason borrowers refinance is to get a lower interest rate than their existing loan.
Lenders will often gradually raise the interest rate on a home loan over time whilst offering better rates to new customers. This is called the ‘loyalty tax’, which borrowers can avoid by refinancing, either through negotiating a lower rate with their existing lender or switching to a new one. Refinancing to a better rate can help mortgage holders substantially reduce their monthly mortgage costs, saving thousands over their home loan term.
Another reason why borrowers choose to finance is debt consolidation. This is involved combining several loan facilities, such as personal loans obtained from multiple lenders, into a single home loan. When this route is taken, the borrower has one total debt to one lender, typically with a more advantageous interest rate and loan repayment period.
Conversely, refinancing can also be used to access equity inside the mortgage to finance a purchase or expense.
Refinancing also allows borrowers to switch between variable and fixed rates, depending on their current financial needs and circumstances. It’s also often used to shorten or extend the length of the repayment period to help borrowers pay off their loan faster or reduce their monthly repayments.
Why would a borrower not want to refinance?
One of the biggest reasons borrowers avoid refinancing is that it can be complex and time-consuming. Lenders are banking on this, and it's why many older home loans typically incur higher interest rates than new ones. Fortunately, the refinancing process is often easier than it appears, especially if you enlist a mortgage broker to help with the process.
Borrowers who consolidate their debt or extend the length of their home loan should be mindful of the additional interest costs that may accrue on their home loan over time.
It’s also important to be careful of any hidden fees or charges that a lender or mortgage broker may include for refinancing. You should always ask about these potential costs upfront to avoid getting stung with a bill later.
What else should I consider before refinancing?
There are several important considerations you should make before refinancing.
The first is to assess your current needs and goals and determine what type of home loan would best help you achieve these. Apply this to your existing mortgage and research other rates and deals available on the market.
It’s also important to review your spending and savings strategy every couple of years to maintain your ability to make loan repayments.
You also need to consider how your overall financial circumstances will be impacted by refinancing; whether that would mean changes to your budget, savings or loan repayment term.
Lastly, you should consult a mortgage broker before refinancing to help you locate and negotiate the best new loan terms for your mortgage.
What information do you need to provide to refinance?
The type of information required may vary depending on the lender. In general, you will need to provide the following when:
- Valid identity such as a driver's license, Medicare card, or passport.
- Details of your employment, income, assets, and liabilities. Here, you will need payslips and bank statements.
- Your credit score
- Information regarding your existing loan, such as your repayment history and loan balance.
- Existing property details, including a new valuation on the property, are needed to assess its current value.
It is a sound financial practice to review your current mortgage and consider refinancing every couple of years. This will be critical for managing rising interest costs and helping adapt your home loan to suit your current needs.
If you are considering refinancing, speak to one of our expert mortgage brokers for a free consultation. Our finance team have extensive experience helping borrowers find the lowest interest rates on the market, with our refinancing services (typically) costing the client nothing.
Lastly, if you're wondering how much refinancing may cost or save you on your home loan, check out our free refinancing calculator tool.