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This article covers the main reasons for refinancing a mortgage and the best time to refinance your mortgage.
This is a story about Tom, a homeowner and father of 3, and a mortgage broker who helped him to refinance and save big!
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Homeownership has never been more expensive. If, like me, you purchased your first home in the past 10 years you’d know exactly what I mean. It’s likely you clawed your way into the market, beating out a horde of other hungry buyers, investing every last cent of savings into your own version of the great Australian dream.
Unfortunately for many, the initial high associated with becoming a first-time homeowner is soon replaced with that ‘will I ever be able to afford to do anything fun again’ kind of feeling.
Throw in the cost of some cosmetic renovations that always end up costing twice what you budgeted, and the well soon begins to run dry.
All of this without taking into account the added costs, and reduced income, associated with starting a family.
Re-reading this, it would almost serve as a contraceptive for would-be homeowners. So let’s shift focus to the good parts of owning a home you purchased in the last 10 years.
The good bits of homeownership
Homeownership may be hard, but it’s also incredibly worth it. The dedication, patience, and discipline you showed to ‘get into the market’ now mean you’re riding one of the greatest property booms Australia has ever experienced.
Reflecting on my own journey, having experienced all of the above, I decided earlier this year I wanted to be able to:
- Finally, complete renovation work on our home
- Have a cash buffer to cover our family for unforeseen expenses; and
- Start an investment portfolio so that all of our wealth wasn’t tied up in our home
First Step: find out how much I could save by refinancing
The first step I took was to call a mortgage broker to have a conversation about refinancing our home loan.
Given we had purchased our home 6 years ago, and have seen the increase in property values in the local area, I had a rough idea there would be some equity in our home (the difference between the value of the property and the amount owing on the home loan) that we could release to help fund all of the above.
Our mortgage was with one of the ‘Big 4’ banks at the time, but I wanted to make sure we got the best rate out of all available lending options, which is why I decided to go with a mortgage broker. Brokers tend to have access to a much wider range of lenders and home loan options.
Given this was the first time we had refinanced, my conversation with the broker began with “how do I refinance my home loan?”
Refinancing can be a complex process so it’s important to ask lots of questions upfront and to work with a broker or lender who is prepared to guide you through every step.
Once we got into the process, the broker identified two home loan refinance options.
- Option 1 had a lower interest rate and a lower ‘cash out’ amount. The cash-out amount being the amount of equity the lender was willing to allow us to release; and
- Option 2, which had a slightly higher interest rate but with double the ‘cash out amount’ allowing us to release $212k from the equity in the property
Given our interest in starting an investment portfolio, we decided to go with option 2. And the best part was, even though the interest rate was slightly higher than option 1, the rate was still less than we were paying on our existing home loan.
Having now completed the refinancing process, I feel like it’s the best thing we’ve done since purchasing our home. I just wish we’d done it sooner. Knowing we finally have a cash buffer, will be able to complete our renovation, and can begin to dabble in investments has been such a welcome change to the regular concern about our money.
I’m also really thankful we dealt with a broker and not directly with a bank. We had lots of questions and there is quite a bit of paperwork involved, so it definitely pays to be selective about who you use to refinance your home loan.
The broker helped to answer some of the most common questions like:
- Should I refinance my home loan?
- How do I refinance my home loan? And
- Can I refinance an interest-only home loan?
Our broker has been good enough to share his responses to these most frequently asked questions which you can read below this article.
I hope you’ve found this article to be a handy reference if you’re considering your options when it comes to refinancing your home loan.
If you’re interested in entering the next phase of your life better prepared and would like to know what your options are when it comes to refinancing your home, seek personalised advice from your bank, or an accredited mortgage broker.
Thinking of refinancing your home loan and want to make sure you get the best deal minus the hassle?
Let our finance experts help you find the best solution for your needs
Book a callFrequently Asked Questions Answered by our Mortgage Broker:
What are the main reasons for refinancing a mortgage?
The primary drivers for a refinance arise when a client is looking to save interest on their current mortgage or is looking to borrow additional money. Additional borrowings can be for the purpose of utilising the equity in their property for an additional purchase, consolidating other debts, or releasing equity for non-structural renovations to their property.
Does refinancing lower your loan amount?
Generally, the answer to this question is no unless for some reason the income earning capacity of the applicants has substantially reduced since the original loan application, or there has been some other material change that has taken place. The majority of refinances are at least for the same amount as the existing mortgage.
What is the general rule for refinancing a mortgage?
The general rule is that the refinance should meet the objectives of the client, whether that is to borrow additional money for a specific purpose or to lower the cost of repayments compared to the existing loan. The objectives test is a good benchmark to apply when considering a refinance.
What is the purpose of refinancing?
The purpose of any refinance should always be to meet the client’s objectives. This includes borrowing additional monies for a specific purpose or looking to reduce repayments on an existing loan.
How much can you borrow to refinance your home?
Borrowing capacity is determined by a combination of factors which includes the income and equity position of the applicants, the family structure (number of dependents in the household), and the living expenses of the applicants. Each lender has their own credit policy and rules that also impact an applicant’s borrowing capacity, meaning a good mortgage broker is always best placed to assist a client in working out their maximum borrowing capacity.
Can you refinance your mortgage at any time?
As a rule of thumb you need at least 6 months of home loan statements and repayment history to refinance an existing mortgage to most mainstream lenders, otherwise, the answer is generally yes. It is noted that if you are on a fixed rate product, the existing lender may charge you with an economic break cost if you refinance the loan prior to the fixed-rate expiring, hence this always needs to be considered alongside the client’s objectives, to ensure the refinance does present a benefit.
Can I refinance my mortgage if I make less money?
You may or may not be able to refinance, noting that borrowing capacity is determined by a combination of factors which includes the income & equity position of the applicants, the family structure (number of dependents in the household), and the living expenses of the applicants, as well as lender policy. Each individual circumstance is different, and a good mortgage broker is always best placed to assist a client in working out their borrowing capacity.
Can I refinance my house if I own it?
If a property is owned outright there is no loan to be refinanced so the answer is no, however, if the owner wishes to raise a new loan against the property this can be considered by a number of lenders, subject to the purpose of the funds meeting the lender’s requirements.
Why would a bank refinance its own loan?
This situation would likely only arise if an existing customer was looking to restructure their existing loan (ie reset the loan term over a 30 year period for example) or were completing a new property purchase and were cross collateralising the new and existing properties, and were aligning this under a new loan agreement.
What do banks need for refinancing?
As a rule of thumb, banks will need to verify each applicant’s income, living expenses, and identity, as well as complete a valuation on the property. Every bank’s requirements do differ slightly, and a good mortgage broker is always best placed to assist with this.
Is refinancing better than a personal loan?
A home loan is a loan secured by real property, whereas a personal loan by nature is often an unsecured loan. Therefore the first consideration when considering the two options is that the interest rate on a secured home loan will always be lower than the interest rate on an unsecured personal loan. It is important however when considering this question to understand what the purpose of the funding will be used for, as there will be instances where either loan type is more appropriate than the other.
How do you know when it’s time to refinance?
As the mortgage lending market constantly changes, it is always good to complete a periodic health check on your home loans with an experienced professional, to ensure that your existing loan continues to meet your current needs and objectives. A review every 2 years at a minimum should be considered.
How long do you have to have a mortgage loan before you can refinance?
6 months as a rule of thumb.
Can you refinance a fixed loan with the same bank?
Yes, you can however in breaking the fixed rate loan you may incur an economic break cost which is still payable to the existing lender even if you remain with them.
Can you break a fixed loan?
Yes, you can. However, breaking the fixed rate loan may result in you incurring an economic break cost which is a consideration to always keep in mind.
Can you remortgage a fixed-rate mortgage?
Yes. However. It is beneficial to keep in mind there may be additional costs to this. Breaking the fixed rate loan may result in an economic break cost which is a consideration to keep in mind.
