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Refinancing Your Home Loan in 2021

Megan Fraser Fact Checked Updated: 28 January 2021

Thousands of Australians are battling to keep up their mortgage payments as the Covid-19 pandemic takes its toll on the global economic landscape.

The Australian Bureau of Statistics (ABS) recently revealed that 11% of homeowners struggle to maintain payments to keep the roof over their heads. The ABS also revealed that one in seven homeowners, representing 14% of Australians with property mortgages, have had their home loan payments reduced or deferred since the start of the coronavirus.

Switching to a better home loan could typically help save you thousands of dollars a year. Generally, the home loan market is incredibly competitive. You’ll typically be able to compare mortgage refinance options from several different loan providers to find the option with the best interest rates, lowest fees and the best features for your requirements.

Reasons for refinancing your mortgage

Typically, there are many reasons for wanting to refinance your mortgage. This includes the ability to choose your repayment frequency. Or you may be interested in features that help you save on interest while paying off your loan faster. Perhaps you want to divide your loan between variable and fixed rates, with no transfer fees.

Generally, the following are common reasons for refinancing:

  1. Better interest rate – Refinancing for a lower interest rate can save you money and help pay off your home loan sooner. Lower monthly payments give you more cash in your hand and, if you set aside a portion of that extra cash towards increasing your mortgage repayment, you will pay off your home loan faster.
  2. More flexible features – You could be coming to the end of a fixed-rate term and want to find out if you can get a more flexible home loan or a better interest rate. Generally, you will avoid “break cost” fees associated with leaving a fixed rate home loan if you wait until after your fixed term to refinance.
  3. Consolidate debt – You could simplify your finances and save money by consolidating debts such as personal loans, car loans or credit cards and incorporate them into your mortgage.
  4. Home renovations – Typically, it’s a good idea to relook your mortgage if you’re planning to renovate your home. You may be able to find a loan provider who offers better rates than you’re currently paying. Or, your home may have increased in value, and you’d like to make use of that additional value to make improvements.

What is a refinance home loan?

Generally, when you refinance a home loan, you take out a new loan to pay off your existing mortgage. Then, you’ll typically pay off your new mortgage, which may have lower payments and interest rates. Your new loan may also have additional features like Line of Credit or Redraw facilities as well as access to an offset account.

Enticements include a $2k cash bonus on refinancing loans of $250 000 upwards. Talk to your mortgage consultant to avoid additional fees when refinancing your home loan such as break costs, application fees and exit fees.

Benefits of refinancing

Generally, there are several benefits associated with refinancing. It simplifies your personal finances by consolidating all of your debts under one umbrella. Banks are designing finance products to save you effort, money and time, prioritising your changing personal circumstances. Secure the best refinancing deal possible by reviewing all options on the market.


Alternatives to refinancing

Although there are several benefits associated with refinancing a home loan, there are several disadvantages that you should also take into consideration. For instance, switching loan providers could result in you having to pay several fees. These may include, exit fees, application or valuation fees on your property as you set up your new loan.

Additionally, entering a refinance loan agreement typically means you’ll be locked into an extended loan repayment period. So you’ll be paying for you home for the foreseeable future. Typically, lenders offer to refinance loans with repayment periods of 25 or 30 years. Therefore, you could end up with a longer loan term than the years left on your current mortgage. Before switching banks, make sure that the benefits on offer outweigh the costs.

Typically, you’ll be able to make use of the following alternatives:

Usually, it’s best to compare the costs of switching your mortgage before deciding to refinance.

How to refinance your mortgage

Typically, you’ll need to follow the following steps when applying for a refinance loan:

  • Compare your options: Generally, it’s a good idea to compare all options available to you to find the right refinance loan to suit your requirements.
  • Contact your bank/broker: You can apply for a loan to refinance your home online, or you could speak directly to a representative from your loan provider.
  • Apply for a loan: Once you have selected a bank to refinance your mortgage, you can go ahead and make an application.
  • Submit your documents: Include all required supporting documentation. Once your application is approved, you will be notified and issued with a Letter of Offer. This needs to be signed and returned to the bank as soon as possible.
  • Arrange your settlement: If switching banks, make sure that your existing bank is aware of the refinancing so that they can provide your new home loan financier with the necessary information to ensure a fast settlement.

Finding the best refinance home loans

Home loans are long-term debts, so, typically even the smallest saving in interest rates can have a significant impact over several years. For example, an extra $50 payment each month on a typical $400,000 30-year-mortgage at a 4.5% interest rate will shave five years off your repayment term.

Generally, it’s best to get the shortest loan term you can afford. Your loan term is the period stipulated in which to repay the loan. The period impacts the size of the mortgage repayment as well as the interest rate.

A shorter loan term of 20 years equates to higher repayments but bat a lower rate of interest. A longer loan term, for instance, 30 years, means lower repayments but higher interest rates. Remember that even 0.5% lower could save you thousands of dollars over time.

Home refinance

Types of refinance loans

Banks offer various refinancing packages such as more flexibility or allowing you to pay off your loan faster. Some of these options cost more, so make sure that they are worth the sacrifice. Examples of refinancing mortgages available are:

Frequently asked questions and answers

  • How does refinancing your home loan work?

    Generally, refinancing allows borrowers to rewrite their home loan at a lower interest rate, or for more convenient features. Home loans can be refinanced with existing lenders, or you may choose to switch to another bank.
  • What does refinancing your home loan mean?

    When refinancing your home loan, you’ll typically move your home loan from one lender to another. A refinanced mortgage is considered a new loan, irrespective of the number of years you have already been paying off your home loan.
  • Does refinancing a home loan hurt your credit?

    Refinancing your home loan can hurt your credit rating. This impact on your credit score could make it difficult to negotiate lower interest rates for future applications. Typically, it’s harder to qualify for a new loan if your credit history is poor and you have several refinancing applications on your record.
  • How much does refinancing a home loan cost?

    Generally, this depends on your unique circumstances. Typically, you’ll be required to pay various fees like discharge, valuation and upfront fees. You may also be required to pay fixed rate break costs as well as government fees. All of these costs add up, so it’s generally in your best interests to compare all of your options before settling on a refinance loan
  • Is refinancing a home loan a good idea?

    Typically, this depends on your situation. If you can afford a saving of at least a half per cent, then refinancing your home is not a bad idea as it will save you thousands of dollars in the long term. However, make sure that you will be able to cover the new monthly payment. Also, take your time before making a final decision.
  • How much money can refinancing save?

    Generally, refinancing your home loan can be one of the most effective ways to cut costs. However, the exact amount of money that could potentially be saved generally depends on your unique circumstances.
  • Do you need a deposit to refinance your home loan?

    Yes, you are required to have at least 5% equity in your home when applying for refinancing. Typically, the higher your equity stake, the less risk you will be to a lender. Equity will help you to secure home loan refinancing.

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