Thinking about refinancing, but want to know how it might affect your credit score? Or how it might impact your loan treatments in the long-run? Or even just the documents you need on hand to refinance?
Below are 10 of the most frequently asked questions about refinancing a home loan - answered.
There are a number of reasons to refinance your home loan:
You might want a better, cheaper interest rate
You might a different interest rate (fixed vs variable, principal and interest or interest-only etc)
You might want a home loan with better features;
You might want to access the equity in your home (to buy another one, to pay for a big expense etc.)
You might want to do some renovations (more on this below)
You might want to consolidate other debts (credit cards, car loans etc.) into your home loan
Ultimately, most reasons for refinancing boil down to switching to a more suitable home loan for your needs.
You can refinance to fund renovations. To do this, you simply refinance to another lender, or a different home loan with the same lender, and borrow some extra cash to cover the renovation. This involves adding extra to your initial loan principal, which can make the loan more expensive overall, but this can be a cheaper way of financing large-scale renovations than other options, such as a personal loan, which might come with higher interest rates.
If you have equity built up in your existing loan you can also use that.
Generally, when refinancing you’ll need to present the following documents to your chosen lender:
Recent payslips that document your income.
Your latest Tax Assessment Notice
A letter from your employer that confirms your salary
Forms of ID, like your passport or driver’s license
Financial and credit documents (such as credit card statements, evidence of your current mortgage, bank account statements etc.)
Having all of these on hand can make the refinancing process smoother.
The usual refinancing process involves applying for a home loan, then your new lender contacting your current one to arrange the transfer of debts (aka your mortgage). The length of time this process will take can vary from lender to lender, but generally speaking, it will often take between two and four weeks.
Although it can depend on the lender, you might have to get another valuation done on the property when refinancing. Real estate transactions such as refinancing will often need to have a valuation done when refinancing as the lender will need to know what the property is actually worth before they take it on.
Equity is basically just the difference between the current value of the property, and how much of it you own. The more of your loan you’ve paid off, the higher your equity will be as you own a higher percentage of it.
When refinancing, equity functions in much the same way a deposit does. If you own more of the property (and have, say, a loan to value ratio of 60%), then you may qualify for one of that lender’s lower home loan rates as you’re offering them more security as a borrower. It also means you can avoid paying lenders mortgage insurance (LMI) again if you own at least 20% of the property.
Find out more about how much equity you need to refinance.
Home loan top-ups are similar and different from refinancing. While refinancing is the act of switching to a new home loan, home loan top-ups are when you increase your existing home loan, allowing you to borrow more by using the equity in your home. There are some similarities between them though:
You might have to go through the application process again for a top-up, similar to refinancing
Some lenders will charge new fees for top-ups, like establishment fees
The lender will reassess your survivability
You can use a top-up for financing purchases like weddings or renovations, which you can also do by refinancing
Not all home loans allow top-ups, such as most fixed-rate loans. If yours doesn’t, you might need to refinance anyway.
Yes, refinancing can affect your credit score, as refinancing is considered to be a credit application. A bad credit score can influence your chances of being approved for refinancing, and rejection can negatively impact your credit score too. So too can applying for multiple refinances in quick succession.
Certain lenders don’t put pre-approvals or pre-qualifications on your credit score, so it can be worth seeking these out before refinancing so you can know what you will and won’t be approved for.
Depending on what you refinance to, it can affect your loan in the long-term: For better or worse. For better when you switch to a home loan that has lower fees and a lower interest rate, saving you tens of thousands of dollars over the entire loan term. Or for worse (long-term), if, for example, you refinanced to a longer loan term, which might make your loan payments cheaper each time, but overall you’ll be paying more as you’re stretching out those payments over a longer time frame.
1. Work out if you’re saving money
The first tip for refinancing properly is to actually work out if you’re saving money: There might be no point to refinancing if you just end up paying more through a higher or similar interest rate, and you have to take into account extra fees like break fees, establishment fees and switching fees as well. Some loans don’t charge these if you refinance.
2. Know what you’re refinancing for and be ready
The second tip would be to make sure you know what you’re refinancing your home loan for, and not to just do it because you can. Are you refinancing to save thousands on your loan? Or to free up some extra funds for a renovation? Or are you refinancing to consolidate other debts into a lower-rate loan?
Refinancing to the wrong type of loan can be costly.
3. Thoroughly compare low-rate home loans
But arguably the most important thing you can do is to thoroughly compare a variety of different low-rate home loans to find the best one for you, instead of just switching to the first one you see.
loans.com.au has a range of very low-rate loans among the most competitive in the market. If you’re ready to refinance, why not apply now or book an appointment with one of our friendly lending specialists to get started on refinancing your loan.