Refinancing your home: Exactly what you need to know

Refinancing your home could save you money and even give you a little extra cash for home improvements.

Before you commit though, you need to do your homework to understand whether refinancing is the right move for you.

Here’s your ultimate 11-step checklist to make a smooth transition to a new lender.

What is refinancing? 

Refinancing refers to the process of paying out your currency home loan and taking out a new loan, either with your existing lender or through a different lender.

It’s not a particularly complicated process, and it could save you money if you find a better home loan rate with an alternative lender.

Today, lenders can approve your new loan within days, and switching lenders only takes a few weeks from start to finish.

When should you refinance? 

There are plenty of reasons why you should consider refinancing. Firstly, you could end up with a better interest rate if you’re looking to consolidate your debts or if you want to buy a subsequent property.

Secondly, you could also end up with better loan features, such as an overdraft facility. Refinancing is also an opportunity to tap into any home equity you’ve built up.

1. Compare rates 

Compare repayments between your existing loan and the new loan to understand your interest rate and monthly fees. The quickest way to do this is to use the mortgage calculator.

Be sure you are comparing apples with apples. For example, if your current home loan provides you with a redraw facility or offset account and the new lender doesn’t, you may end up worse off, even if you secure a lower interest rate.

Also, read the fine print so you understand any costs involved in ending your existing home loan and setting up a new loan.

2. Keep up loan repayments 

Most people think the first step in refinancing is to call a broker, but the process starts before that with a critical step – making sure you keep up with your current required payments, explains Adelaide-based Mortgage Choice mortgage broker Fiona Manley.

“We’ve had a few people come asking for help to refinance when they’ve already started missing payments and it’s really tricky in that situation. If you’ve been making your existing repayments, then you’re on the right track,” Ms Manley says.

“Your everyday account activity – like overdrawn accounts – can raise red flags, even if your mortgage is on time.”

Keeping up loan repayments is particularly important as the nation moves to open banking, because your banking conduct can be seen by both your existing and potentially your new lender.

3. Call a broker 

Once you’ve had an initial look around the market to see what’s rates are available, the next step is to call a broker and discuss your current rates and repayments to see if there are better options out there.

Given that the lending market is so competitive in Australia, most often there are better rates available out there.

“Consider what you might need into the near future too, because it can be costly to refinance and then realise three months later than you need a new car,” Ms Manley says. “If you need extra cash, it’s easiest to get that at the same time as completing the refinance.”

4. Understand the risks 

Extending your loan term can cost you. If you’ve had your loan for more than five years and you refinance into a new 30-year loan, you may end up paying more over time – even with a lower rate.

It’s not just the interest rate that matters: The real savings can come from:

• Paying your mortgage weekly instead of monthly
• Paying more than the minimum
• Combining repayments that with a better rate

5. Understand the costs 

Lower rates are great but make sure you weigh up the savings against the costs of moving lenders.

You might see cashback payments from lenders of around $3,000, which can sound enticing. These cashback offers come and go from the market. Make sure you look beyond that to understand the costs. 

You also need to understand the difference between fixed and variable rates so you can understand why the solution presented by your broker would work better for you.

A variable loan refers to a loan in which the interest rate charged on the outstanding balance varies as market interest rates change.

A fixed rate loan means the terms of the loan are locked in, meaning the interest rate and minimum repayment stays the same.

Refinancing fees could include: 

• Application fees
• Early termination fees
• Valuation costs
• Lenders’ Mortgage Insurance 
• Transfer costs
• Stamp duty fees, charged in some states

5. Compare apples with apples

You are going to need to dedicate a chunk of time to make sure you understand what lenders are offering, and how that might impact your situation.

When comparing loans, here’s what to consider: 

Loan type: Fixed or variable? Know the pros and cons of each

Features: Would you benefit from an offset account, or will a basic loan do the job?

Loan term: Check how many years are left on your current term, and don’t stretch it unless you really need to.

Total cost: Fees, repayments and interest savings need to be considered – not just the rate.

6. Prepare the documents 

Refinancing means applying for a new loan, which means you need to go through the same application process when you applied for your existing loan.

Manley reminds anyone considering refinancing that your broker will ask for you to provide a lot of documents so they can help you a better deal.

“Collecting documents is a huge pain point for customers as well as brokers, but there are good reasons we’re asking for a particular item, so please be patient,” Ms Manley explains.

“Once you’ve provided all the documents required, the broker will check which banks you qualify with and recommend a couple that specifically suit your circumstances.”

7. Choose your lender 

Your broker has taken you this far. Now, it’s up to you to make the choice of lender. Once you’ve made your choice, the broker will act on your behalf to create application documents that will be sent for final review and signatures before they are sent to the lender on your behalf.

“Sometimes you don’t need to move to a new lender. Instead, you can negotiate with your current bank is a great win, and your broker can potentially help you with this,” Manley says.

Also, it’s critical to keep your current loan term, which sometimes homeowners overlook, Ms Manley adds.

Approve or deny 

Hopefully, your lender approves your application.

At this stage, your broker can help you complete the formal discharge with your older lender so the new lender can take move the mortgage, and your application moves towards settlement.

Sign on the dotted line 

The new lender will let you know you have been approved and will provide you with your new documents to sign.

This is a formal contract, so even if it has been explained to you by your broker, make sure you read it closely so that you know what you’re signing up for.

8. Inform your lender

If you have decided to move on to a new lender, now is the time to let your current lender know you’re moving on. They can forward your information to the new lender so the new lender can take over the mortgage of the property.

Of course, if you are using a mortgage broker, they will likely handle this step for you. There will also be some discharge paperwork to sign from your existing lender.

Your new lender will take over the title deeds from your current lender and become the mortgagee on the property at this point.

9. A settlement date is set 

Your broker will make sure your existing lender is talking with your new lender and ensure they have set a mutual date for settlement so your loan can switch to the new bank.

Make sure you allow one to two days for all of your accounts to be set up with the new lender. Your broker will be there to answer any questions you might have in the future.

10. Run your numbers 

Once you’ve got your new home loan in place, don’t fall into a set and forget trap and assume you’re better off.

Particularly in those first few months, make sure you run your own numbers and ensure that you’re paying the right amount off your loan and that you’re not getting behind.

Also, if you’ve got extra savings each week because of the switch, it’s worth considering using that to pay off your home loan faster.

11. Review annually

At least once a year, you should take the time to review your mortgage and ensure the home loan meets your needs.

Contact your broker and see what’s new in the market and take the time to shop around. Because staying with one lender can cost you big time over the years.

This article first appeared on Mortgage Choice and has been republished with permission.

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