What does refinancing mean?
While some refer to refinancing as ‘switching’ or ‘transferring’ your current loan to another loan, you’re actually paying out your current loan and creating a new one in its place: usually with better features and a lower interest rate either with your existing bank, or with another bank.
When is it worth refinancing?
It may be worth refinancing if you’re looking to save money, consolidate debt, pay off your home loan faster, or tap into the existing equity in your home. Refinancing can also be a good way to take advantage of the market or solidify your financial position: say, if you’re on a variable home loan and want to swap to a fixed rate home loan to lock in the same repayment amount.
When shouldn’t you refinance?
If you’re planning to sell or the value of the property has decreased substantially, it might not benefit you to refinance. If you’ve had some bad debts in recent years, that could also impact getting a good deal. Similarly, if you’re moving from full-time employment to running your own business and may be facing a period of unreliable income, it may be difficult to refinance. It also may not be worth refinancing if you’re on a fixed rate home loan, as breaking the fixed rate can be costly, or if the costs of refinancing outweigh the potential savings.
Should I refinance with my current lender or a new one?
You may choose to refinance with your current lender, or a new lender that can offer you a better deal. Refinancing is a big decision and it’s always a good idea to shop around.
Should I re-value my home before refinancing?
It’s worthwhile getting a current market value of your home before you attempt to refinance as this will help you determine the equity in your property and give you a baseline for calculating your borrowing capacity (see ‘How much can I borrow?’ below).
What is the LVR?
The LVR is the loan to value ratio. This is a measure of the amount of your loan compared to the value of your property. If you are buying a new home, the LVR is calculated by dividing the value of the property by your loan amount, so if the home’s value is $250,000 and your loan amount was $200,000 the LVR would be 80%.
What does LMI mean?
LMI stands for ‘Lenders Mortgage Insurance’ and it’s usually required by the bank if you want to borrow more than 80% value of your home. LMI protects the lender against non-payment or default on a loan.
What is equity?
Equity equals the value of your home in the current market, minus what you still owe on the property.
How much equity do I need to refinance?
Generally you will need to have built up around 20% equity in your home in order to refinance. If you don’t have that much equity, you can still refinance but you may need someone to go guarantor on the new loan, or pay LMI if your LVR is above 80%.
How much can I borrow?
If you’re refinancing to borrow more money – perhaps for a renovation – you can calculate a rough estimate of your borrowing capacity by knowing how much equity is in your home and your loan-to-value ratio (LVR). It will depend on a number of other factors including your income and existing debts.
What type of loan should I choose?
It’s wise to chat through your options with the lender or a mortgage broker to determine which loan suits your needs, but here’s a quick breakdown of a few common home loan types:
- Variable rate loans: Variable rate loans mean that the interest rate is variable, and they it can go up or down from time to time.
- Fixed rate loans: On a strict budget and want predictable repayments? Fixed rate home loans mean that the interest rate is fixed for a set period of time, generally between 1-5 years.
- Interest only loans: On an interest only loan, you’ll pay just the interest for a period of time rather than the interest and the principal loan balance. These loans are popular with investors.
- Line of credit loans: If you want to refinance in order to renovate, this type of loan enables you to access the equity in your home.
How do I choose a home loan term?
When refinancing, you may be asked if you want to keep the term of your current mortgage, or a longer term. If you’ve paid off your mortgage for 10 years and you refinance to another 30-year mortgage, your repayments will be lower, of course, which can be a relief for many homeowners. However, doing this will mean you ultimately pay more in interest as you are extending the term of your mortgage. If you want to pay off your mortgage faster and reduce the amount of interest you pay, consider refinancing to a shorter loan term.
What does it cost to refinance?
If you’re moving to another lender, you may have to pay discharge fees on your existing loan and application fees on the new loan you’re creating. This may be a few hundred dollars or more depending on the lender. Talk to your broker or the lender about fees before you make the switch.
What are Key Facts Sheets?
Key Facts Sheets (KFS) are documents provided by lenders which offer you a snapshot of a particular home loan product. They provide information on the type of loan, the interest rate, the comparison rate, special features of the loan, frequency of repayments, what you pay over the life of the loan and other key facts. Lenders must provide these to you if you request them – and some banks offer an online tool so you can generate one yourself. A KFS is a great way to compare different loans and determine which one is right for your situation.