7 Reasons to Refinance Your Home Loan in 2021
6-MINUTE READ
It might have been years since you took your home loan out. Interest rates change all the time. Your financial situation may have changed dramatically. You don’t have to stick with the same loan terms you were offered when you first applied for your mortgage.
For example, it might be time to refinance if you had a high Loan to Value Ratio (LVR) when you first applied and were saddled with high-interest rates and Lenders Mortgage Insures (LMI). Or, you might want better loan features that weren’t available to you before.
We’ll run through why you should refinance your home loan in 2021 and the steps to do so.
What Is Refinancing?
Home loan refinancing is the act of negotiating a more favourable deal with your current financial institution or applying for a new home loan with a different lender. Essentially you replace your existing home loan with a new one. The idea of refinancing is to help you save on your loan repayments. Although, there are many different reasons why home buyers refinance their mortgage.
Even if you’re not sure whether the time is right for refinancing your home loan, it’s sensible to check whether there is a better deal out there annually.
The Benefits of Refinancing Your Home Loan
When is the best time to refinance your home loan? Ideally, if you’re going to refinance your home loan, it’s sensible to do so when interest rates are low. However, there are many other benefits you can get from home loan refinance. Read on for our top benefits of refinancing in 2021.
A Better Interest Rate
The main reason homeowners opt to refinance their home loans is to get a lower interest rate in order to reduce their monthly repayments and the overall amount paid across the loan’s lifetime.
The best way to secure reduced interest rates, make a plan for how you would like to restructure your loan. Determine what rate you want – not necessarily the best rate, as this differs from lender to lender and borrower to borrower. If you aim for the best rate, then you may end up dissatisfied. Instead, aim for a target rate that is achievable for your financial situation.
If your own lender won’t offer you reduced interest rates, or their offer doesn’t meet your target rate, feel free to shop around elsewhere. Refinancing doesn’t have to be kept internal with the same lender. A broker will help you find a new home loan elsewhere that suits your needs.
Get a free Australian mortgage assessment today.
Before Rates Rise
When you decide the time is right to refinance, you might want to consider the current interest rates. Generally speaking, interest rates tend to rise over time. Therefore, they may not be as low as they were when you first took out your mortgage. However, in 2021 Australia’s interest rate is currently at a record low and has been for the last year.
When you took your home loan out, it might have been at a 5% interest rate. If you refinance now, you’ll likely see the rate drop to 3%, significantly reducing your interest repayments.
While interest rates might be at a record low now, we’ll probably see them rise again in a few years. Therefore, it’s always worth checking which way the interest rates are going before refinancing your home loan.
Reduce or Remove LMI
If you took out a home loan when you were unable to save the required 20% deposit, then your lender likely required you to pay Lenders Mortgage Insurance (LMI). LMI is an insurance policy that protects the lender should the borrower default on their payments. LMI can be as high as tens of thousands of dollars in addition to your principal and interest repayments.
Plus, you’ll likely have to pay interest on your LMI if you capitalise it on your loan.
This can significantly increase the cost of the home loan. While you can’t usually get a refund for LMI payments, you can stop them by refinancing your mortgage once you’re in a better financial situation. You will need to have paid 20% equity on the property; otherwise, when you refinance, other lenders will charge you again for LMI.
Switch Between Variable and Fixed Rates
For many people, a fixed-rate home loan is the best option for making your monthly repayments. You’ll be in a better position to budget as the interest rate will stay the same for the fixed-rate period. However, the fixed interest rate only tends to last from one to five years. After which, you will be expected to pay a variable interest rate.
Yet, if you refinance your home loan, you can switch to a fixed-rate loan again. This might be especially advantageous if interest rates are low. If you were to refinance today to a fixed-rate mortgage, you would benefit from these lower rates for up to five years.
Access Home Equity
In all probability, your home is your most valuable asset. If you’ve owned your property for a fair few years, then there is a chance that you have built up a fair amount of equity. If you want to buy a new investment property in Australia, then you can refinance your current property to use instead of a cash deposit.
You will need to calculate the amount of equity available. To do so, use the estimated property value minus the loan balance secured by the property.
While you might be able to access the total amount of equity, can you afford the additional repayments? You need to work out how much you can realistically afford to release, given your current financial circumstances. If you want to unlock more than 80% of the property’s equity, you will have to pay LMI.
Then, you should consider your home loan options and whether there are any additional fees. It’s a good idea to discuss these stages with a mortgage broker who can advise you.
Get a free Australian mortgage assessment today.
Consolidate Debt
You likely have several other debts. Like most Aussie expats, along with your home loan, you might have a personal loan, car loan, and perhaps a credit card. It can be challenging to manage multiple repayments to different debts.
By refinancing your home loan, you have the opportunity to streamline your debt. Debt consolidation means combining several debts (usually with higher interest) into one debt with a lower interest rate. As the largest loan, your home loan is an excellent option to refinance and reduce your monthly repayments of multiple debts.
Although, it’s worth remembering that switching home loans for debt consolidation is not always as appealing as it seems. It can turn the short term loans involved into a long term debt on which you pay interest for a longer period of time. Therefore, debt consolidation might cost you more than paying each loan separately.
To make debt consolidation worthwhile, you need to make extra repayments throughout the loan’s lifetime to reduce the loan term.
Better Loan Features
Many homeowners refinance their home loans to access better features. Whether your existing lender didn’t offer such extras when you applied or you didn’t qualify, there are many features that make paying off a home loan easier.
For example, you might want to get access to an offset account or redraw facility. Both offer ways to reduce your loan term and reduce the amount of interest paid. An offset account is a transaction account linked to the home loan, while a redraw facility is the option to make additional flexible repayments. Often, the lender might only offer you an offset account if you meet their lending criteria.
You might also choose to refinance to reduce your loan terms. Perhaps when you first took out your home loan, you could only afford minimum monthly repayments over a more extended period of time. If you want to reduce your loan term, you’ll save money on your overall home loan.
Drawbacks of Refinancing
Refinancing your home loan might seem like an appealing option. However, there are a few downsides.
Firstly, you need to check whether your loan with your existing lender charges early repayment fees. If so, do the benefits of refinancing outweigh the exit fees? On top of paying your current lender to leave, you might also have to pay an application charge or a mortgage registration fee for your new loan. Take care to budget properly.
Secondly, refinancing can take time. You can’t refinance with the first new lender you see; it takes a lot of effort to shop around. However, we are here to help ease the search and get your new home loan sooner.
How to Refinance Your Home Loan
If you have decided that refinancing your home loan is the right decision, follow our steps to apply for your new home loan.
How Much Can You Borrow?
Before you start the hunt for your new home loan, it’s important to review your current finances. Lending criteria apply, and it’s crucial that you know whether your circumstances will be approved.
Typically, lenders want to know why you are refinancing, your financial history, and whether you can afford to make the repayments. Loan approval, eligibility criteria and how much you can borrow by your LVR. If your LVR is 80%, then they will likely offer you favourable terms for your home loan refinancing.
What Do You Need From Your Home Loan?
Why do you want to refinance your home loan? Do you want to switch to a fixed-rate home loan or want an offset account? Whatever the reason is, assessing what you want from your new home loan is important so you know where to look and you don’t end up with a deal that is not dissimilar from your existing loan.
Also, you should communicate what you want to the financial institution or home lending specialist, as they will then present their best deals to you.
Compare Home Loan Options
Just like when you first apply for a loan, you’ll need to shop around. Comparing home loan options might seem difficult; how can you decipher the jargon? How do you know that the home loan options you’re looking at are suitable for expats? That’s why it’s a good idea to speak to an expert about which home loans they would recommend and whether you meet the eligibility criteria.
Before making your mind up to leave your current lender, it’s sensible to get in touch with them and see if they can offer you a better deal internally.
Get a free Australian mortgage assessment today.
Understand the Costs Involved
While many homeowners refinance their mortgage to get better interest rates, it’s worth remembering to take the comparison rate into account too. This tells you the actual cost of a loan, including additional fees. Comparison rates are required by all lenders with an Australian credit licence.
As an expat, lenders will consider your foreign income differently than if you primarily earn Australian dollars. They might only look at 50-100% of your net income, which might significantly disadvantage your chances of getting better loan terms. We’ll connect you to lenders who offer favourable terms to expats.
It’s also important to check whether you are contracted to pay exit fees or break costs if you leave your current loan early. Depending on the home loan refinance deal you find, the cost of switching lenders might be too great to be worth it. A mortgage broker can explain the costs to you and break down the interest and comparison rates.
Details You'll Need to Supply
Whether you go through a mortgage broker or directly approach a lender, you’ll need to supply similar details as with your first home loan application.
These include:
- Personal details, e.g. name, age, address, contact details and proof of identity.
- Employer and their contact details.
- Evidence of income, e.g. payslips and tax returns.
- Your current expenses, e.g. bank statements, bills, etc.
- Other assets, including property, investments, cars, contents of your home.
- Liabilities and other debts.
In addition, you will need to supply information about the home loan you are refinancing.
In Summary,
Home loan refinancing is a big commitment. There are many reasons why refinancing is a good decision. However, it’s important that you define for yourself what you want out of your new home loan. Speak to a mortgage broker about what new loan terms and cost savings you can reasonably expect.
Get a free Australian mortgage assessment today.
Frequenly Asked Questions
What Is the Point of Refinancing?
Refinancing is when you replace your current loan with a new loan, either with the same lender (internally) or by approaching a new lender. You might lower your monthly repayments, save on the amount you pay in interest, pay off your mortgage sooner, and release your home’s equity.
How Much Can I Refinance on My House?
Refinancing the entire loan might be challenging. Many lenders will likely offer you a min loan amount of 95% LVR. However, you will have to pay LMI on any loan amounts above 80% LVR.
What Is a Good Credit Score to Refinance a Home?
Any credit score above 600 will place you in good standing to get low rates. The higher your score, the better your loan terms will likely be. However, working with a mortgage broker will help you get a good home loan, whatever your credit score.
Does Refinancing Hurt Your Credit?
On the whole, refinancing might cause your credit score to drop slightly as taking on new debt and having hard inquiries will affect you. However, this dip will be minimal and temporary. Your score should recover over time if you continue to repay your loan on time.
How Much Does It Cost to Refinance?
As with setting up any loan, there are costs involved. These additional fees might include a mortgage application fee, property valuation fee, exit fees, and loan settlement. You might expect to pay anywhere between 2-5% of your loan amount in additional costs when you refinance.
What Do You Need to Refinance Your House?
You’ll need to share personal, financial, and employment details with your new lender. You can evidence this with payslips, tax returns, bank statements, and bills. Plus, you will need to provide information about your current loan and the property attached.
Does Refinancing Lower the Interest Rate?
One of the main reasons people refinance their home loans is to lower their interest rates. Even a reduction of only 1% will lead to significant savings. Seek independent advice about what you can reasonably expect from refinancing your home loan.
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