A refinance loan is a new home loan that is designed to restructure your finances, potentially giving you access to additional funds and lowering the cost of your repayments.
Many people think that once you have a mortgage with a particular lender, you are locked in with that lender for the life of the loan, and on the same terms. This is not the case, and in Australia it has become significantly easier to change mortgage lenders and rearrange your home loan on improved terms.
Therefore, if you want to refinance for any reason, you can potentially negotiate with your current institution, or change lenders altogether if that affords you a deal that better suits your goals and life circumstances.
Nevertheless, before considering a refinance loan, it is important to ensure that the benefits outweigh the costs.
Why do I need a refinance loan?
There are any number of reasons why you might opt to take out a refinance loan, depending on the makeup of your family, your time of life, changes in your circumstances, or your financial goals.
One of the most common reasons to refinance is to unlock the equity in your home.
> Refinancing your home loan to access equity
The term equity applies to the difference between the price at which your property is currently valued and the amount outstanding on the mortgage. For instance, if you have a home valued at $400,000 and there is $200,000 remaining to be paid off the loan, the equity in your home is calculated at $200,000.
This equity can then be used to obtain additional finance, using the property as security, or you can redraw additional repayments that have been made. It’s also a highly efficient way of reducing outgoings and freeing up additional cash each month.
> Pay off your mortgage more quickly
It is possible that a refinance loan enables you to pay off your mortgage more quickly. For example, if your new home loan has a lower interest rate, your monthly repayments will be lower. However, if you can still afford to repay your mortgage at the same rate as you were previously paying, the net effect will be that you are paying less interest and reducing the overall size of your home loan more quickly, potentially knocking years off your mortgage.
> Moving, upgrading or downsizing your home
If your family has grown and you need somewhere bigger to accommodate you all, or alternatively the kids have moved out and you want to downsize, a refinance loan can help you to achieve your aim. Perhaps your work situation has changed and so you need to relocate, or you now want to live closer to the kids’ schools.
Alternatively, it might be that your financial position has changed and you are looking to upgrade from your first home.
> Debt consolidation
It is possible to use a refinance home loan as a means of consolidating existing debts, i.e., any money that you have outstanding on credit cards or personal loans can be paid off using money from the new loan. This generally has the advantage of a lower rate than cards or an unsecured personal loan, and so your monthly outgoings will be reduced. There is the added benefit of greater convenience, as you only have a single repayment to make each month.
> Family break up
If your family has grown and you need somewhere bigger to accommodate you all, or alternatively the kids have moved out and you want to downsize, a refinance loan can help you to achieve your aim. Perhaps your work situation has changed and so you need to relocate, or you now want to live closer to the kids’ schools.
Alternatively, it might be that your financial position has changed and you are looking to upgrade from your first home.
>Refinancing your home loan following redundancy
Although it can be difficult to refinance your home loan if you have been made redundant, it is possible if you can demonstrate that you have equity in your home, or sufficient savings. You might also be able to refinance if you have a guarantor for the loan.
Not all lenders are open to offering refinancing to people who have been made redundant; however, they do exist. In order to improve your standing with potential lenders, you will need to establish that you are able to service the debt and, if possible, it is also helpful if you can clear any other existing debts.
> Refinancing when you’re retired
In retirement, reevaluating and potentially refinancing your home loan is more important than ever. However, for retirees in particular, there are a number of potential approaches to refinancing, depending on your goals and circumstances. You might, for instance, be looking for a lower interest rate in order to reduce your monthly outgoings, or a refinance loan that enables you to access the equity in your home.
As a retiree with a fixed income, it is especially important to consider the costs associated with refinancing, and whether in the long run these outweigh any savings you might make.
> Refinancing after bankruptcy
It can be difficult to refinance your mortgage even after you have been discharged from bankruptcy, but there are specialist loan providers who will offer mortgages to former bankrupts and other borrowers with bad credit. You can, however, expect to be charged a higher interest rate.
Bankruptcy normally lasts for three years and one day from the day you file your statement of affairs, and credit agencies will keep a record of bankruptcy on your file for either five years from the date you become bankrupt, or for two years after you are discharged (whichever is the longer). Therefore if you are still within this period, you will be required to declare to any potential lender that you have previously been made bankrupt.
As above, there are specialist lenders who will consider lending to people who have been declared bankrupt in the past, but in this area of the mortgage industry, perhaps more than any other, it is important to seek professional help from an experienced mortgage broker before speaking to potential lenders.
Types of refinance home loans
If you are considering a refinance home loan, there are a number of products on the market that may suit your needs.
1. Offset account
An offset account operates along the same lines as a regular bank account, but it is also linked to your home loan. When you deposit your salary or other funds, these are then offset against the outstanding balance on your home loan. This affects the overall remaining balance of the mortgage and can help to reduce the amount of interest you are paying, while still allowing you to access the funds as you would with a regular bank account.
2. Package home loan
A package home loan will combine your mortgage along with a range of other financial products into a single bundle. The advantage of such an arrangement is that it will often come with reduced fees on your offset account and/or credit cards, as well as discounts on other products like insurance. You will generally be charged a single, annual fee for all of the products in the bundle, rather than separate charges for each.
3. Line of credit home loan
If you have substantial equity in your home and are looking to refinance, a line of credit home loan may be a good option. This allows you to access the equity in your home quickly and easily, along the lines of a regular bank account, and if you use this line of credit to make other purchases for which you would otherwise require a loan (e.g., a new car, a holiday, etc) you are essentially borrowing money for these at home loan rather than personal loan interest rates, which can mean considerable savings.
4. Low-doc home loan
A low-doc (i.e., low documentation) home loan means that a lender is prepared to waive some of its normal documentation requirements in terms of proof of income. This sort of home loan may suit people who are self-employed, have been working abroad, or who work seasonally, and who are not able to provide proof of income in the same way that someone who has a regular salary is able to do.
Low-doc loans are also an option if you have significant equity in a property, have access to a sufficient deposit sum, or you already have paid off and own outright another property (or multiple properties).
5. Fast refinance home loan
It can take time to organise a refinance home loan, particularly if your old lender drags their feet and does not go out of its way to expedite the process. However, fast refinancing is a tool by which your new lender can speed up the process. They do this by releasing the funds directly to your old loan account so that it can be closed before they receive the title to your property. This means that the entire refinance process can in some cases be completed in a matter of weeks.
Most lenders who offer fast refinance don’t charge you for the service, and it means that you can save a considerable amount of interest.
6. Interest-only refinance home loan
When you refinance with an interest-only loan, you are only repaying the interest rather than the principal in the initial stages of the loan, which means lower monthly repayments for a set period of time.
This could enable you to pay off more expensive borrowing (e.g., credit cards, personal loans, etc.), or an interest only loan could be useful for providing bridging finance (e.g., if you have found a new home before you have been able to sell your old one).
You do need to factor in that with an interest only loan you may end up paying back more than you expected over the long term, and it may mean that you are not building up equity at a sufficiently fast rate.
7. Split interest rate refinance home loan
A split home loan combines fixed rate and variable rate elements, giving you a degree of certainty and some financial flexibility at the same time. One part of the mortgage will be a fixed rate loan (i.e., interest rates are unchanged over a prescribed period of time), while the variable part will see the interest rate charged rise or fall in line with offical Reserve Bank rates.
The benefits of this arrangement include the ability to get a competitive interest rate for the fixed component, plus the ability to make additional repayments on the variable component of the loan.
It also has to be borne in mind that you might be charged break fees if you decide to pay out the fixed rate part of the loan, or you might find yourself paying considerably more on the variable component if there is a significant rise in interest rates.
Fees and stamp duty when refinancing
When you take out a refinancing home loan, you may be liable for stamp duty, the rate of which will be determined by the state in which you live, as well as the type and cost of the property.
However, you might in some circumstances be able to avoid stamp duty costs; these may include if the name of the borrower and the amount of the loan remain the same, or if you refinance with the same lender. In some cases, you may have to pay the stamp duty up front, but then receive a refund from the lender.
There may well be other fees associated with a refinance home loan as well. These can include a fee when you make a new loan application, or a discharge fee from your current lender. If you are offering a property as security on your refinance loan, you will likely need to pay a valuation fee. You may also incur land registration fees in some jurisdictions in Australia.
How do I apply for a refinance home loan?
As we have seen, there is a lot to take in when you are considering a refinancing loan. This is why it pays to speak to a specialist mortgage broker who has experience in assessing the various products that are available, and who can advise you as to how refinancing will work best for you.
Finnciti can help you to find the refinance loan that will best meet your needs and enable you to reach your financial and investment goals.
As home loan specialists, we have access to a range of financial products from a wide variety of lenders, and as such are able to provide you with a range of products and rates that the individual borrower is usually unable to obtain.
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