Refinance home loans

Need to refinance your home loan because the loan term has ended, or because you think there are better loan features out there? Finty is your one-stop-shop for loan refinancing advice and comparing available deals.

By   |   Updated 25th April 2020

Comparing refinance home loans for $450,000.00 over 30 years

Smart Home Loan 80 (Owner, Principal and Interest)

On loans.com.au's website

Smart Home Loan 80 (Owner, Principal and Interest)

Interest rate (p.a.)

2.63%

Comp rate^ (p.a.)

2.65%

Max LVR

80.00 %

Application fee

$0.00

Monthly repayment

$1,808.61

Total repayment

$651,099.60

Highlights

  • Explore loans.com.au's award-winning, low-rate home loans with added personal service for each stage of your property investing journey.

Overview

Do you need to refinance your owner occupier home loan? It may be because the loan term has ended, or because you think there are better loan features out there, or because you want to access some of the equity you have built up in your home. Finty is your one-stop-shop for loan refinancing advice and comparing available deals.

The way refinancing home loans works

Refinancing your home allows you to obtain a better rate, term, or other features like an offset account or extra repayments and redraw facility. You may choose to refinance by getting a better deal with your existing lender, or switch to a new lender. It's not a question of getting a mortgage for your new home, but a new mortgage for your current home. Your new lender (or the same lender if you're not switching banks) will pay out your existing loan with some or all of the funds from your new loan.

Reasons why you should refinance your home loan

You may decide on home loan refinancing for any of the following reasons.

Your original loan is about to come to the end of its term

When your existing deal expires, it is highly likely that your monthly repayment will change. And depending on the terms of the deal you had, your new monthly repayment may be higher or lower. Refinancing is an opportunity to take control of that.

You think you can get a better rate than the one you are currently paying

Perhaps you took out your current deal several years ago and in the interim, the landscape has changed substantially. This is the situation many Australians find themselves in today. Assuming your current deal is no longer competitive, refinancing means you can lock in a new lower rate.

You want to switch from a fixed interest rate home loan to a variable interest rate loan, or vice versa

Your current loan may be interest-only and you've decided to repay the principal, or maybe you just want the lowest possible interest rate regardless of it being fixed or variable. When you refinance, you can compare the market and decide what's best for you as you plan for the future.

You want to reduce your monthly payments by opting for a longer repayment term

A lower interest rate is one way to reduce your monthly repayments, but when you refinance you can change the repayment term too. If the interest rate stays the same then this will cost more in the long run, but if you want to have more cash at hand at the end of the month and don't care about the total amount repaid, then extending the repayment term on your loan is an option when you refinance.

You're looking for a loan with better features, such as an offset account, extra repayments or redraw facility

Maybe you earn more now and can afford to put money into savings or even repay an extra amount every month. Perhaps you just want the flexibility to draw down funds. When refinancing, you can choose a loan with the features that suit you and your finances.

You'd like to access some of the equity you have built up in your home

Whether you would like to renovate your home or make an investment, refinancing is an opportunity to access the equity in your home and use it.

Learn about refinance home loans

Get answers to your questions about refinancing your home loan from our team.

  • Pros & cons
  • Tips
  • FAQs

Access the equity in your home

As you repay your home loan over a number of years, you build up equity in your home. Equity is the difference between your home's market value and the amount of home loan you still have left to repay, and it also increases if the property market sees a general upswing in prices. You may want to access your equity in the form of cash to spend now, and you can do so by refinancing. If your home is worth $500,000 and your loan balance is $200,000, you could possibly refinance with an LVR of 80% (i.e. a $400,000 loan) and pocket $200,000 in cash (less refinancing fees).

Consolidate your debts

You could also use the equity you have in your home to consolidate your short-term, high-interest debts into a refinance home loan. For example, if you have enough equity in your home to release $20,000 by refinancing, you could use the cash to repay expensive credit card debt or pay off a car loan.

Debt consolidation can be a financial risk

While it might seem like a good idea to consolidate high-interest credit card or personal loan debt into a low-interest mortgage, by accessing your home equity, be aware that this can backfire if you end up with a monthly home loan repayment that will overstretch your budget.

Lower monthly repayments

By switching to a refinance home loan with a lower interest rate or a longer repayment term (or both) you can significantly reduce your monthly repayments.

For example, if you have a loan with $350,000 remaining to be paid over 16 years, with a comparison rate of 4% p.a., your monthly repayment will be $2,471. If you decide to refinance your loan at the same 4% p.a. rate for 20 years, you will reduce your monthly repayments to $2,121. Even better, if you refinanced at a lower rate, say 3.8% for 20 years, your monthly repayments would go down to $2,084.

Possible higher interest cost in total

If your financial situation means you need to refinance to get lower monthly repayments by stretching out the repayment period over a greater number of years, you could end up paying more interest in total.

For example, if you have a loan with $350,000 remaining to be paid over 16 years, with a comparison rate of 4% p.a., your monthly repayment will be $2,471 and you will pay a total of $124,429 in interest charges, according to the Mortgage Calculator at moneysmart.gov.au.

If you decide to refinance your loan at the same 4% p.a. rate but for 20 years, you will reduce your monthly repayments to $2,121, but you'll end up paying a total of $159,023 in interest over the longer 20-year period. Even if you refinanced at a lower rate, say 3.8% (reducing monthly repayments to $2,084), you'd still pay more in interest ($150,215) over 20 years.

Refinancing fees can be expensive

Home loan switch fees, break fees, discharge fees, new home loan application fees, LMI and mortgage stamp duty can all add up to a sizeable amount, possibly several thousand dollars, in refinance home loan costs. Try to make sure that either the interest cost you will save by refinancing will cover the fee cost in three years or less, or that the easing of pressure on your ongoing financial situation will be worth the amount you will pay in fees.

Save money

Refinancing a home loan at a lower rate can produce significant interest savings, provided you don't stretch out the loan repayment term at the same time. By switching a $350,000 loan account at 4.5% p.a. comparison rate with 16 years still to run, to a new loan with a comparison rate of 4.0% p.a. you would save a total of $17,190 in interest costs if you kept the repayment term to 16 years.

Switch from variable rate to fixed rate, or vice versa

Variable interest rates and fixed interest rates both have their benefits and drawbacks, depending on your financial situation. If you're stuck with one kind of rate and want to swap to the other, you can do it with a refinance home loan.

Features to consider when comparing refinancing home loans

When comparing available home loan options with each other and with your current loan, these are the features you need to consider:

  • Interest rate: Can you get a lower rate than the one you’re currently paying? Don’t forget to look at the comparison rate (the rate that includes the effect of all fees associated with the loan) for a clearer picture.
  • Loan type: Are you looking for a standard ‘principal and interest’ loan (where your periodic repayments include a portion of the loan principal as well as the interest charges) or an interest-only loan (where you only pay interest charges and do not reduce the loan principal)? If you’re planning to switch to an interest-only loan, consider the possible consequences (explained on our ‘Interest only home loans’ page).
  • Rate type: Interest rates can be fixed or variable or split. Make sure you’re comparing rates of the same type, and if you’re considering a rate type that’s different from your current loan, consider the advantages and disadvantages of each rate type (explained on our ‘Fixed rate home loans’ and ‘Variable rate home loans’ pages).
  • Loan term: Always look for the shortest term you can afford without putting your budget under too much strain, since your interest costs during the life of the loan will be much lower if you have a shorter term. You may want to consider asking your prospective new lender for a term that is equal to the term that remains on your existing loan. Or ask for a shorter term so that you can make larger repayments and pay the loan off faster, or for a longer term if you want your periodic payment amount to go down.
  • Other loan features: A fixed interest loan may have few features, but with a variable rate loan you may be offered features like an offset account (where your spare cash reduces the amount of interest you pay because it’s offset temporarily against the loan amount), or the ability to make extra repayments (to pay the loan off faster and reduce interest costs), or a redraw facility (letting you withdraw cash if necessary from your loan account if you’re ahead with your repayments). There may be fees associated with these extra features.
  • Switching incentives: Some lenders will offer cashback or other incentives to borrowers in order to persuade them to refinance their loan. This can be a useful way of reducing the cost of refinancing, but make sure that the loan you are applying for has all the competitive features you need.

What you should do before deciding to refinance your home loan

Don’t make a rash decision. Take these  steps before you decide to jump ship:

  • Ask your current lender for a better deal: If your current lender can retain you as a customer, and you can avoid some of the costs associated with refinancing, everybody wins. Your existing lender may be prepared to offer you a better interest rate, or a different type of rate (e.g. changing from a fixed rate to a variable rate), or a different term and more flexible features (such as making extra repayments, an offset account and a redraw facility). The more equity you have in your home, the greater your bargaining power will be, so it may be worth waiting until you have at least 20% equity, as a result of your repayments or an increase in the value of the property.
  • Check the cost of refinancing: Switching home loans comes at a cost, so make sure you’re aware of the associated fees. Once you’ve worked out the cost, check that it’s not going to be more expensive than sticking with your current loan. Refinancing may be more expensive if you have only a small amount of loan principal (e.g. less than $75,000) or a very short term left in your loan.
  • Tidy up your credit score: Whether you’re negotiating with your current lender or looking for a new loan, it’s always a good idea to have an attractive credit score since it will make you a desirable customer eligible for lower interest charges. Take some time to fix your credit score using our fast credit score improvement tips.
  • Compare your options: Check out all the available refinancing home loan offers on this page.

You can save a lot of money with a refinanced home loan

Let's say you have $350,000 left to pay on your home loan, with 16 years to go, and your current comparison rate is 4.5% p.a. By switching to a new loan with a comparison rate of 4.0% p.a. you would save a total of $17,190 in interest costs if you kept your repayment term to 16 years, according to the Mortgage Switching Calculator at moneysmart.gov.au. So even if your refinancing fees amounted to $3,000, you would still be ahead in less than three years (the time it would take you to save $3,223 in interest).

Can I access some of the equity I have built up in my home by refinancing?

Yes. This is another common reason for refinancing. You may have reduced your loan amount as a result of the repayments you have made over several years. At the same time your home may have increased in value as a result of a rising property market.

If your loan amount has reduced from, say, $400,000 to $370,000, and your home’s value has increased from $500,000 to $615,000, you now have a 40% equity in your home. If you were to refinance with a Loan to Valuation Ratio (LVR) of 80%, your refinanced loan amount would be $492,000, your deposit would be $123,000, and you would be able to withdraw $122,000 in cash. You could use that cash for renovations or extensions, or for debt consolidation by paying off debts with a higher interest rate than your home loan, or for any other purpose you choose. But remember that your periodic repayments will now be higher because you have borrowed a larger amount.

Does refinancing your home loan affect your credit score?

When you apply for a home loan, a 'hard enquiry' for credit occurs when the lender requests a copy of your credit report. A note will be made in your credit file, and there will be a small downward impact on your credit score. Although the enquiry will stay in your report for five years, there will only be a serious downward impact if you make lots of applications within a short time. Even if you're in the habit of making frequent applications for credit cards (which is not itself a good idea) you're unlikely to be applying to refinance your home loan on a regular basis. Just do your research thoroughly and find a loan that will suit you for a good number of years.

How much does it cost to switch home loans?

Your home loan refinance costs could include:

  • An internal loan switching fee if your current lender offers you a better deal
  • A break fee if you’re changing from a fixed rate to a variable rate with your current lender
  • A loan discharge fee (e.g. $350) if you’re terminating your current loan
  • A loan application/establishment fee (e.g. $600) if you apply for a loan with a new lender
  • A new Lenders’ Mortgage Insurance (LMI) policy premium (e.g. equal to 1.5% or more of your mortgage amount, or around $6,000 on a $400,000 mortgage) if your equity in your property is less than 20%, but try asking your current lender for a refund of a portion of any LMI premium you may have already paid
  • Stamp duty to register the new loan, which varies depending on which state you live in but is likely to be between $100 and $200

Is it better to use a broker for refinancing home loans?

While a mortgage broker certainly has some expertise when assessing your financial situation and the loan market, and can save you time and hassle if you don't want to do the legwork yourself. But it's now easy to compare all your loan options online, where dozens of lenders are competing for your business and can see each other's rates (which will make their offers even more competitive).

Bear in mind that the mortgage broker has a business to run, and if you don't pay his fees the lender will, which means that another cost is built into the conditions you are being offered. A broker may also only work with certain lenders or be paid more for recommending particular loans, limiting or influencing your choice.

And yes, Finty does receive a fee, paid by the lender, for presenting your loan options to you, but it's much less than a mortgage broker's fee. So if you are prepared to do your own research and comparisons, with Finty's help and advice, you can potentially save heaps.

Is Lender's Mortgage Insurance required to refinance a home loan?

Lender's Mortgage Insurance (LMI) is usually required if you have a Loan to Valuation Ratio of more than 80%. That is, if the amount you need to borrow is greater than 80% of the value of the property because you have a deposit of less than 20%.

If you are refinancing your home loan you have probably been repaying your current loan for long enough to have built up an equity of more than 20% in your home, and it's therefore less likely that you will need to pay LMI. But if you do still have an equity of less than 20% (because you may want to increase your loan amount in order to release some equity as cash or for debt consolidation) you still have the option of asking a family member (such as a parent) to guarantee your loan.

What is a refinanced home loan or refinanced mortgage?

It's a second or subsequent loan on a property, taken out because the first loan is about to expire or because the loan agreement will be voluntarily terminated before expiry. A common reason for borrowers to seek refinancing is because one or more features of their current loan – such as the interest rate, loan amount, fees, or other features – may no longer suit them. Put simply, it’s a way of switching your home loan to another lender, or in some cases renegotiating with your current lender, to get a better deal.

Which bank is best to refinance your home loan?

The simple answer is that it's the bank or other lender that is offering the best deal to suit all of your needs. So you should decide which feature is most important for you. Is it:

  • The lowest interest cost?
  • The longest term?
  • The lowest refinance fee cost?
  • The lowest ongoing fees?
  • The most flexible features?
  • The best incentive (e.g. cashback) for new loans?

Or is it a combination of more than one of these points? Select the points that are most important to you, and then compare on this page the deals with your required features.

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