As a property investor, keeping your expenses down can help you get the best results from your rental property. While mortgage repayments are unavoidable, you can lower how much you need to pay by learning how to refinance a home loan.
Refinancing a home loan is a smart strategy to score a cheaper interest rate, reduce your total loan amount and help you tap into equity to expand your property portfolio.
In this blog, we’ll be covering everything you need to know about refinancing a home loan, what to consider before refinancing, a step-by-step guide to how to refinance a home loan and even a snapshot of the best home loan rates in Australia in 2022
What is refinancing a home loan?
If you’re wondering “how to refinance a home loan?”, don’t worry, you’re not alone. A recent study by Aussie reveals that a whopping 78% of mortgage holders aren’t sure what refinancing actually means either (as evidenced by the common Google query, “refinance home loan meaning”)!
Essentially, refinancing means switching your current home loan to a new one. It can be smart to refinance a home loan if you can secure a lower interest rate and decrease your monthly repayments to help you pay down your loan faster.
In most cases, this involves going to a new bank or lender (or chatting with your current lender to secure a more competitive mortgage rate). As interest rates change regularly and new banks are constantly entering the market, it’s worth reviewing your mortgage every year or two to check how your current rate stacks up.
The process of how refinancing a home loan is very similar to taking out an initial mortgage. Once you’ve found the loan you want to apply for, you’ll need to complete a loan application and get your current property valued. Plus, you’ll need to have the paperwork ready to support your application (which usually includes things like proof of income, bank statements and your most recent loan statements).
More Australians are refinancing their home loans than ever before. The latest stats from CoreLogic show that 67% of property valuations in 2020 were done to allow owners to refinance (up 32% from the previous year).
Why should you consider refinancing a home loan?
The key reason why most investors and homeowners choose to refinance is this: cost savings.
In fact, the Australian Competition and Consumer Commission (ACCC) reveals that investors stand to save $17,000 in interest by switching to a new home loan.
By learning how to refinance a home loan, you decrease your rental property expenses (a.k.a. Your mortgage repayments) and pay off your loan faster. Without a loan to repay, all your rental income will be extra cash in your back pocket.
Let’s run you through the main benefits of refinancing your home loan:
- Refinancing can help you score a lower interest rate: banks tend to offer their most competitive mortgage rates to new customers. So, by refinancing and switching to a new lender, you can score a much lower interest rate on your home loan.
- Refinancing can lower your home loan repayments: lower interest rates mean lower monthly repayments. Not only does this reduce your rental property expenses but means you can pay down your loan faster.
- Refinancing can help you unlock equity: plus, the sooner you pay down your home loan the sooner you can build equity to fund renovations, cover the costs of major repairs or even help you to build your property portfolio.
Can I refinance my home loan?
Are you wondering, “can I refinance my home loan?”. If your mortgage’s fixed rate loan period is coming to an end, this is also a smart time to consider refinancing. By scoping out the current rates available from different lenders, you can find the best interest rate and secure the most cost-effective home loan available.
What are the costs of refinancing a home loan?
While refinancing can lower the costs of your repayments over the long term, there are a few upfront costs you need to consider, too.
The main types of costs and expenses linked to refinancing include:
- Mortgage application fees: also known as an establishment fee, this one-off cost will generally set you back roughly $250.
- Property value fee: this may be charged if you’re looking to borrow more than 80% of your property’s equity. Typically, this fee varies from lender to lender as well as your property’s location, but on average costs around $200.
- Discharge fee for termination of mortgage: if you’re moving to a new bank, your current lender may charge you this fee (around $200 to $400) to cover the admin of ending your loan contract.
- Break cost: if you’re ending a fixed rate home loan before the end of your fixed term, you’ll need to pay a break cost. It’s difficult to estimate the average price of break costs as it's based on the loan amount as well as the length remaining on your fixed term (so chat with your lender to find out what specific fees may apply).
- Settlement fee: this is paid to your new lender to kick start your new loan, usually costing around $210.
- Mortgage registration fees: this is charged by your local state or territory government and ensures your property’s loan is registered (to prevent you from selling it without paying back your lender). This can cost anywhere from $100 to $180 or more.
- Exit fees: while reforms have limited how much lenders can charge for exit fees, it’s worth checking what fees may apply to your loan (as it can be up to $7,000).
With all of these costs in mind, how can you tell if refinancing your home loan is the right move? On average, it can cost upwards of $1,000 in fees to refinance a home loan.
It’s worth doing the maths to see if this initial cost is outweighed by the amount you stand to save from a better interest rate. If you’ve got the cash flow to spare and stand to save a significant amount of money, refinancing can be a smart way to increase your returns as a property investor.
Your step-by-step guide to how to refinance a home loan
Are you asking yourself, “how do I refinance my loan?”. You’ve come to the right place. Let’s run you through our step-by-step guide to how to refinance a home loan.
Understanding your refinancing goals
The best money moves are made with goals in mind. As an investor, you need to make sure every decision you make is aligned to your big picture objectives.
Whether you want to score a lower interest rate, pay off your loan faster or build your property portfolio, start by clarifying why you want to refinance in the first place. This will help you make the right move for your investment goals.
Run the numbers
Now, it’s time to crunch the numbers to figure out if refinancing your home loan will help you reach your goals.
Start by figuring out all the upfront fees you’ll need to pay to end your current mortgage and move to a new loan. Next, work out how much you expect to save by switching to your new home loan.
Make sure to figure out how much you still have to pay off, your current interest rate, your current monthly repayments and your loan-to-value ratio. Use this to compare to a new lender and see if your interest rate and monthly repayments are lower (and will save you money).
Apply for a new loan
Once you’ve found a loan (from your current lender or a new lender), it’s time to make the switch happen.
When it comes to how to refinance a home loan, having all the paperwork sorted will make your life a whole lot easier. To submit your application, make sure to include:
- Your personal information and ID (such as driver’s licences and birth certificates)
- Evidence of your income (including payslips or tax returns and Business Activity Statements if you’re self-employed)
- Your latest home loan statement
- Evidence of your living expenses and any other loans or credit cards you’re paying off
- Records of any other assets you own (such as other investment properties)
Plus, another key step to how to finance a home loan is to secure a property valuation. If your property has a low loan to value ratio and is allocated in a metro area, a digital valuation will likely take place.
If not, your lender may require a physical valuation that can take up to five business days.
Score loan approval
With all the paperwork sorted, your lender will formally approve your loan. At this point, your new lender will send you the Loan Offer documents and mortgage discharge forms to refinance your loan.
Your new lender will liaise with your old bank to pay out the balance and change over the names on your loan records. Now, your new loan and mortgage repayments will begin.
A snapshot of home loans rates in Australia in 2022
We’ve rounded up some of the most competitive home loan rates in Australia in 2022 to help you compare your options and find out if you should refinance your home loan.
Based on a loan amount of $600,000 over a 30 year loan term (principal and interest), Here are five of the most competitive loans to consider when refinancing.
Home loans rates in Australia for 2022
Loans.com.au - Smart Booster Home Loan Discounted Variable Loan
Yard Home Loan - Principal and Interest
Macquarie - Basic Investment Loan (Principal and Interest)
Westpac - Flexi First Option Investment Loan
Macquarie - Basic Flyer Home Loan (LVR 70-80%)
When it comes to understanding how to refinance a home loan, the biggest thing to consider is whether the initial costs are outweighed by the potential savings. By crunching the numbers and discovering the steps involved in how to refinance a home loan, you can make the right move for your investment goals.
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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.