In this post, I share a clear, easy to understand explanation of how to refinance your home loan. I’ve broken the process down into nine manageable steps
Most families with a home loan are paying more interest to their bank every month than they need to.
How do I know?
Because I’ve helped over four hundred families refinance their home loan to a better rate.
The money they’ve saved on repayments has enabled them to:
- go on holidays,
- renovate their home, or
- just breathe more easily each month.
They changed the quality of their life WITHOUT having to work harder!
They simply put the extra money they were needlessly paying in interest to the bank back into their own wallet by refinancing their home loan.
Despite these attractive benefits, I’ve noticed that sometimes people are reluctant to explore the option of refinancing. Now sometimes, refinancing isn’t the right option. In some cases, my clients or potential clients come to me, ask me to research their options, and we find that they’ll be better off financially by sticking with their current loan.
However, often people won’t even consider refinancing their home loan because they believe it will be ‘too much hard work’ or they aren’t sure where to start. The good news is, with expert guidance and support, refinancing can be a smooth and relatively painless process, I promise.
The home loan refinancing process can be broken down into nine steps:
- Set your home loan refinance goal/s
- Assess your current financial situation
- Research loan
- Choose your loan
- Submit paperwork
- The bank processes your refinance
- Post settlement
Let’s take a closer look at each of the steps:
How to refinance your home loan in nine (painless) steps
Step 1 – Set your home loan refinance goals
It’s important to be clear about what you want to achieve from your refinance.
For example, your goal may be to save money on repayments or use equity to fund home renovations. Having a clear goal will help guide your decision around which home loan to choose.
To help you figure out your goal/s let’s take a look at the benefits of refinancing your home loan:
Home loan refinancing benefit: Save money with a lower interest rate
The most common reason for people to refinance their mortgage is to switch to a lower interest rate. Interest rates are extremely low at the moment.
For example, I recently saved my client over $200 per month on their home loan repayments by refinancing their home loan to a lower rate.
They have a balance of $450,000 on their home loan and were paying 3.79% interest (comparison rate: 3.79%).
I switched them to a home loan with an interest rate of 2.79% (2.81% comparison rate).
Home loan refinancing benefit: More flexibility
Many people only discover the full details about their mortgage when it’s too late. They try to do something and get told by their bank that either they can’t do it, or they will incur a hefty charge if they do.
An example is a redraw facility. A redraw facility allows you to pay extra money into your home loan and then redraw it later. This feature is not possible with a basic home loan, so many people refinance their mortgage to give themselves this sort of increased flexibility.
Home loan refinancing benefit: Equity
Equity is the portion of your property that you own outright. Typically, house values will appreciate over time. For example, a home you bought for $300,000 five years ago, might now be worth $500,000.
Here’s how to figure out how much equity you have in your property:
How much your property is worth – Outstanding loan amount = Equity
Refinancing your mortgage with a home equity loan might let you tap into that extra equity. Many of our clients access equity to fund renovations, which could add to the value of their property. You may also be able to use your equity to help purchase an investment property. You’d use some of the equity in your home as a deposit to buy an investment property.
It’s important to note that as an investor you can often access up to 80% of your current property’s equity to use as a deposit. You could potentially access more than 80%, but Lenders Mortgage Insurance may apply.
If you’re not sure how to set your home loan refinancing goals, book a free consultation with me.
Check out my video on the benefits of refinancing your home loan, to give you an idea the types of goals you could set for your refinance.
Step 2 – Assess your current financial situation
Next you need to take a look at your current financial situation, including:
- How much equity you have in your home
- Your income
- Any liabilities you may have. For example, expenses and debts
- Your current home loan rate and features
You can either DIY this step or book in for a free refinance consultation. The refinance consultation is the first step in the process. During the consultation we discuss your current circumstances and goals.
This discussion helps me understand the types of mortgage refinancing solutions you’re likely to be eligible for, that will also meet your needs.
Step 3 – Research loans
The refinancing consultation gives me the information I need to start comparing home loans for you.
I have access to hundreds of home loan products from dozens of banks. Some of the banks I have access to aren’t available to the general public. Also, sometimes, I have access to special interest rates and fee discounts or waivers.
I search my database to find home loans with serviceability criteria you’re likely to meet, that will also match your refinancing goals.
I check your eligibility for various loans without them being recorded as ‘credit enquiries’ on your credit report. This means my research won’t affect your credit score.
I create a shortlist of appropriate loan products. When compiling the shortlist, I also calculate switch costs and determine the break-even point of your loan switch.
Here are some of the lenders I have access to:
If you’d prefer to DIY this step, you’ll need to research home loan products either on-line or by contacted banks directly.
Here’s a few tips if you do choose to DIY your research:
- Ensure that when you research a home loan refinance product it isn’t recorded as a ‘credit enquiry’ on your credit report. You don’t want your research to affect your credit score.
- Check for fees, charges and honeymoon rates.
- Review the bank’s serviceability criteria to ensure you’re actually eligible for the home loan refinance product.
Step 4 – You choose your loan
- I present you with a personalised shortlist of suitable mortgage refinance products (home loans).
- I explain the features, benefits and fees for each option.
- You then choose which loan you’d like to apply for.
If you chose to DIY this step our Home loan comparison calculator can help you choose which loan to apply for. Using the calculator, you can compare any two loans on the market for a direct cost comparison. You’ll be able to determine which is the cheapest in total fees and interest over the life of the loan.
Step 5 – Submit paperwork
From here, I ask you to supply documents such as payslips and proof of identity. The documents you need to provide will vary depending on your circumstances and the bank’s criteria. Every bank has different assessment criteria.
I look after all the paperwork for you. I package your application up in a way that makes the bank’s assessment process as easy an efficient as possible. I know EXACTLY what each bank is looking for in an application. So, I make your application as attractive as possible; I help you put your best foot forward.
I then get on the phone and let my personal contact at your chosen bank to let them know that your application has been submitted. I’ve built relationships with contacts from all of the banks on my panel. I find that this process of carefully packaging your application and then calling the bank helps to speed up the application approval process.
Step 6 – Valuation
Once the bank has received your paperwork and decides to progress your application, they will organise a valuation of your home.
Your home needs to be valued so the lender can determine the Loan to Value Ratio (LVR). Typically, the Loan to Value Ratio needs to be 80% or less to avoid Lenders Mortgage Insurance (LMI).
In line with the current COVID-19 social distancing rules, all valuations will be conducted as ‘kerbside valuations’. A ‘kerbside valuation’ means that the Valuer will stand outside your home to assess your home and use other data such as previous sales data to value your home.
Step 7 – The bank processes your refinance
Your new bank contacts your current bank (the one that your home loan is currently with) to arrange the terms of transferring the debt. This can take more than a week, during which time you’ll need to wait until your new loan is approved. As a result, the whole process usually takes up to two weeks.
In some instances, with particular banks, the refinance can be ‘fast-tracked’ and completed within 72 hours. If you choose to fast-track your refinance, your new bank may ask you to pay title insurance. This is designed to cover them is there’s a hiccup in transferring the title of the home from the old bank after the loan’s been settled. Your new bank may offer to cover this expense in some circumstances.
Step 8 – Settlement
After the loan is approved your new bank will contact your old bank to have the property title and debt transferred.
Fees may be involved in the settlement process. I’ll always let you know upfront about any fees involved in the refinancing process. When I research your home loan options, I take factors such as fees into account.
Check out my video on Common mortgage refinancing traps to find out what you need to consider when refinancing your home loan to make sure the refinance will actually leave you in a better financial position.
Step 9 – Post settlement
Once your loan has settled any outstanding setup and discharge fees need to be paid. Some banks will cover these fees. The fees associated with switching loans will be covered by your new bank and rolled into the total amount you owe them.
If these fees are left to be paid over the full loan term, they will cost you significantly more in interest charges. For this reason, making an extra repayment to cover any fees charged can be a wise decision.
Bonus step – Review regularly
It’s essential to keep an eye on interest rates in case your bank increases rates on your particular home loan product. Ongoing rate watch is a service we offer all of our home loan clients.
I also recommend you review your home loan every twelve months. So much can change in a year, so you want to be sure you’re still getting the absolute best deal for your situation. Your credit rating may have changed, the amount of equity in your home will probably increase, and these things can improve your bargaining power. There are always new home loan packages on the market too.
I regularly review my clients’ home loans for them, to be sure they’re still getting the best deal. If I find there’s a better home loan out there for their circumstances I contact them to discuss the possibility of switching.
And that’s it, you’re done
At first glance, the home loan refinancing process can seem quite daunting, but the benefits can be huge.
With expert support refinancing your home loan can be pretty seamless. If you need a hand sorting out your refinance, or would just like to explore whether refinancing is the right option for you, please reach out. I’m only ever a phone call or an email away. You can book a free Refinance Consultation with me here.