How To Refinance Your Mortgage

Interest rates vary between lenders, so do your homework. The Reserve Bank of Australia has raised the cash rate to 4.35% as of June 2024, with inflation proving stickier than first thought. This has bought the cash rate to a level not seen in a decade and there are very few signs that rate cuts will happening in the next few months.

Interest rates across most of the lenders are hovering around 6% for new customers—sometimes lower among credit unions or smaller banks—but will be higher for existing customers paying the ‘loyalty tax’. Remember that even .1% of a reduction can make a big difference if your mortgage is significant.

When shopping around, make sure you look at the comparison rate, which is usually published alongside the variable rate. A comparison rate takes into account not only the interest rate but any fees you will pay as part of the loan package, so reflects the actual cost of the loan. An interest rate offer, with a high comparison rate, is not a great deal as it means the true cost (the comparison rate) is much higher when fees and costs are factored into the loan.

Some borrowers prefer the certainty of a fixed home loan rate, which, as the name suggests, refers to a static interest rate during a fixed-rate period. Some people opt for a bet each way: fixing part of their loan for a period, and keeping the remaining loan on a variable rate.

Others opt to refinance to digital loans, or neobank loans as they’re called n Australia, which offer competitive rates and a simple online application process but are best suited to borrowers with a straight-forward loan and not a complex set-up.

There’s no hard right or wrong when it comes to a fixed or variable home loan. You will need to do your own risk assessment based on your situation. However, be aware that if you choose to make changes to your loan agreement, you could be stung by fees.

Before you do anything, pick up the phone and ask your current lender for a better deal. Let them know that you’re thinking about switching, and that to keep your business, you would need a lower rate.

Let them know where you’re looking at moving to, the lower rates on offer and how much the fees are compared to what they’re offering so you’ve got some bargaining power.

How successful this strategy is will depend on a few things. For starters, the size of your debt and how much equity you have in your home.

Your credit score will also impact your ability to negotiate, so do a quick check on your current score before you pick up the phone.

One advantage of asking your bank to lower your interest rate is that you are spared the hassle of having to go through the refinancing process: your loan package, with all its bells and whistles stays the same, only your interest rate changes. They may also want to charge you a fee for the ‘administrative burden’ of changing your rate, but many consumers have successfully requested these fees be waived and so can you.

There’s plenty of other things to consider before making the decision. For example, when you refinance, you will need to go through a formal application process with a new lender. If you’re in a worse financial situation, you could be knocked back, particularly given that lenders are tightening up their lending criteria amid the tougher economic conditions. Many borrowers are rolling off fixed rate terms to discover that they cannot afford their home at the new higher repayments.

If you haven’t been with your current lender for long, you may not have paid down enough of your mortgage to reduce your loan-to-value ratio (LVR). Given that lenders prefer borrowers with LVRs below 80% for competitive home loans, switching lenders may not be available to you.

Your loan term also comes into play here. If you don’t have long left to pay off your home loan, bear in mind that a new lender may put you on a longer loan term, meaning you are tied to debt for longer.

Decide whether you feel more comfortable with a larger bank, or a smaller digital lender, and what the advantages and disadvantages are for each. You may also wish to talk to a mortgage broker for help.

1. Shop around and see what’s available on the market. Make sure you talk to a few lenders you’re interested in and find out if they are prepared to take on your debt.
2. Once you’ve chosen your preferred option, you will need to go through a formal application process. This means digging out details about your income, assets, liabilities and expenses. The lender will then prepare the paperwork for you to sign.
3. Once you’ve been approved, your new lender lets your current lender know that you’d like to be discharged from the existing loan. Bear in mind that the new lender may want to conduct its own property valuation on your home.
4. Once your new lender has shared the date of settlement with your current lender, you will be given a final pay-out figure. Make sure you take the time to go through the documents to make sure there are no nasty surprises.
5. Your new lender will pay out your old loan and set you up in their system, with new documentation sent to you so you can start making repayments.

It’s important to understand the fees involved in refinancing. Here’s some of the likely costs you’re going to face so you can decide whether the interest rate savings are worth it:

• Discharge fee: Your current lender will charge you a fee to exit the loan contract, which is usually around $300 or $400.
• New application fee: The new lender may charge a fee for the paperwork, usually around $500. Some lenders won’t charge anything in order to secure your business.
• Mortgage registration fees: This state government fee to register a new mortgage is usually around $100.
• Insurance fee: If you purchased your home with a deposit less than 20%, the original lender would have charged you Lenders Mortgage Insurance. Your new lender could charge you this fee again, which could be tens of thousands of dollars. This is important to ascertain at the start of the process.
• Early exit fee: You signed a contract, so there will be a fee to break that. Known as an early exit fee, this fee, also known as a ‘break fee’ will be determined by how long you’ve been with the lender. Again, this fee is important to understand before you consider refinancing elsewhere.

It’s worth noting that as competition for mortgagees heats up, banks are going above and beyond to prevent customers from refinancing and to lure new mortgagees. Many of the above fees are up for negotiation, so shop around to see what your new bank will cover for you on your behalf.