How to Refinance
a Home Loan
2022 Complete Guide
There are many reasons why you may be interested in refinancing your home loan right now.
Many of you may want to understand how to navigate rising interest rates by switching to a lower rate home loan.
Alternatively a mortgage broker may have advised you that a refinance is necessary to help achieve another goal like accessing equity to renovate, consolidating debts or buying an investment property.
Whatever the reason for your refinance, this guide covers off helpful tips to put you in the best possible position.
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How to Refinance a Home Loan Full Guide
What is a refinance of my home loan?
Refinancing your home loan is when you change your existing home loan for a new one.
Most of the time this is with a new bank.
But you can stay with your existing bank too.
Which ever path you take will be determined by your current financial situation as well as what you want the end outcome to be.
1. What types of refinances are there?
Let’s look in more detail at the two options you have when you go to refinance your home loan – an external or internal refinance.
Which is better?
The answer depends entirely on what you are trying to achieve and what your financial goals are.
1. External Refinance (Switch Banks)
This is what most people are thinking about when they talk about the word refinance.
It’s when you change from the bank that you’re currently with, and transfer your loan over to a new bank.
There are many reasons why you may choose this option which this Guide goes into in more detail.
2. Internal refinance (stay with your bank)
An internal refinance is less well known (or advertised) but can be a better option for you.
This is where you stay with the current bank that you have your home loan with, but you make some changes to your home loan.
For example it could be increasing the loan amount or changing the loan term.
An internal refinance is a good option if you are wanting to access equity in your home (which increases your loan amount) to:
- Buy a car.
- Funding non structural home renovations of up to the value of $90,000.
- Consolidate other debts, like credit cards and personal loans, into your home loan.
For these options, an internal refinance is usually a quicker, simpler and cheaper option than an external refinance to a new lender.
2. How much does a lower interest rate save me?
The best way to work out the savings you make if you switch to a lower interest rate is by using an online home loan repayments calculator.
I like this one from CBA, but pretty much all banks have their own version.
The table below gives you an idea.
In this example, on a home loan of $1,100,000 with a 12 month interest only rate of 4.5%, you would pay $4,125 a month in interest.
If you refinanced to a rate of 3.5%, you would pay $3,209, a month in interest.
This is saving of $916 a month in interest that would otherwise be repaid to the bank.
Monthly savings gained by lowering your interest rate by 0.5%, 0.75%, or 1.0%
When should I refinance my home loan?
Generally I recommend you refinance about every two to three years.
Avoid refinancing more frequently than this unless you have a good reason to do so
During this period of rapidly rising interest rates, you may want to review your mortgage right now even if it’s sooner than this.
1. Consider a home loan refinance if answering yes to any of these questions.
Are you in any of these situations?
- You have not refinanced your home loan for at least 2.5 years – and a refinance will clearly benefit you financially.
- Your current lender is not meeting your needs in some other way, for example they don’t offer offset accounts which could save you money.
- It is a necessary step towards reaching a goal like buying an investment property or doing a large renovation.
- You are coming off a fixed rate home loan soon and want to look at your options.
- You are currently on a variable rate.
2. How often should you refinance your home loan?
External refinance (to a new lender)
The general rule of thumb is to wait at least 2.5 years before you refinance to a new lender.
You could refinance after 12 months, but you would want a very good reason to do so (some reasons are covered in chapter 3).
You would need to understand what it will cost you to move to a new lender and work out if overall you are better off.
It’s important to note that a good Mortgage Broker would have avoided a refinance (and all the hassle involved in one) so soon after taking on your home loan in the first place, by asking in detail about your future goals upfront.
These should be taken into account with your home loan already.
Internal refinance (within your current lender)
Ideally you would wait at least 12 months to go back to your bank asking for a refinance, for example to get a lower interest rate.
However you can try sooner if you have a good reason, for example you if want to buy an investment property.
Again, a good Mortgage Broker would have already taken your plans into consideration when you took out the home loan.
3. Should I do anything about rising interest rates?
Consider a variable rate home loan.
There may be good deals from banks and lenders on variable rate home loans which we can look at for you.
If you switch to a lower variable rate today, it means you can build yourself a buffer as rates continue to rise.
This strategy is for you if have :
- An owner occupied home loan; AND
- You are on a variable rate OR you are coming off a fixed rate in the next 4 to 6 weeks; AND
- You have more than 20% equity in your property.
4. How a rate lock on your mortgage guarantess you a lower interest rate.
If you are refinancing to a fixed rate loan.
If your lender raises their fixed rate loan, just before you settle on your home loan, you may end up missing out on the lower rate you initially applied for.
This means you’ll be paying more in interest now.
A rate rise before settlement is actually more common than you might think.
Main reasons to consider a refinance.
The banking industry has done a good job, unfortunately, of ‘teaching’ people they should refinance very regularly to chase a lower interest rate to save money.
Whilst this is one very good reason to refinance, there are also other common situations where a refinance is necessary to help you achieve your goal.
Just jump to the trigger that is relevant for you.
1. To buy an investment property in the next 6 months.
Owning an investment property is now within reach for so many of us.
With the growth in property prices and low interest rates (as just two factors), many of us now have considerable equity in our homes.
You can easily use this equity to as the deposit to buy an investment property.
So if your goal is to buy an investment property in the next 6 to 12 months, now is the time when you need to start looking into how you can make that happen.
You most likely will need a home loan to purchase the investment property and often this involves refinancing the loan on your owner occupied home.
Dealing with home loans every day, I know that some banks really focus on being more investment property focused.
For example, some lenders offer features like multiple offset accounts and allow you to buy the investment property with a higher loan to valuation ratio (LVR) meaning you need a smaller deposit.
On the other hand, some banks don’t offer this at all.
If your current home loan is with one of these lenders that don’t offer the best range of investment property loans, then it makes sense to refinance across to a new lender sooner rather than later.
This is a key step in being able to buy that investment property in the next 6 to 12 months.
The added benefits of refinancing earlier are:
- Ensures you have a clear idea of a budget of what you can afford to spend on an investment property.
- Allows you to start preparing now for the loan, for example you may need to save more money, close credit cards or complete tax returns.
- Enables you to act quickly to buy the investment property you want when it comes up for sale, so you don’t miss it.
- Importantly, it reduces the uncertainly and stress you may feel, at the time when you have made an offer and are waiting to hear if your finance has been approved.
Reasons your current lender may not be suitable.
Let’s look at the main reasons why your current lender, with whom you have your owner occupied home loan with, may not be the most suitable lender for your investment property loan.
Your current lender (with your home loan) may:
- Not lend you the amount you need to purchase the investment property – every bank will lend you varying amounts depending on things like your job and income. If your bank’s own lending rules state you are not able to borrow over a certain amount but another lender will allow you, then a refinance may be necessary.
- Do a valuation to determine the value of your home which comes in too low- this impacts how much you are able to spend on the investment property.
- Not offer you interest only repayments on the investment loan which can be more tax effective.
- Require you to have a higher deposit / use more equity to purchase the investment property (higher LVR).
- Not offer multiple offset accounts which can help save you money on the loan repayments.
As you can see, if you do want to buy an investment property in the next 6 month or so, I would recommend:
- First checking to see if your existing bank (with whom you have your owner occupied home loan with), will allow you to buy the investment property.
- What you need to do to prepare financially to get the investment property loan approved.
- An idea of a budget you can spend on the investment property.
- Starting your property research so you have a good understanding of the suburbs and price brackets.
You may at this stage be interested to learn more about investment loans with this article on having interest only repayments on your investment loan.
We can help with this, so please book a free 15 minute call if you would like advice on how to get your investment property loan approved.
2. To consolidate other debts into your home loan.
If you currently have one or more unsecured debts (in addition to your home loan), then you may want to consider rolling these debts (into your home loan).
You may be able to do this with your current lender (as an internal refinance), or you may need need to refinance to a new lender (external refinance).
People in this situation are often repaying a home loan PLUS moving money around each month to pay off multiple unsecured debts like:
- Credit cards
- Car loan
- Personal loan
- After Pay etc
This is a very stressful situation to be in as:
- Each debt requires a minimum repayment each month, all at different times of the month;
- These debts usually have much higher interest rates than your home loan (some credit card interest rates are up to 25%) so it’s costing you even more money each month.
If you are in this situation, what you may find is that once your salary goes into your account each month, and you make a repayment for each of your debts, you may not have much cash left over to pay for food and other essentials.
So the best thing to consider is rolling all these debts into your home loan.
There are two benefits of this:
- Simpler – only make one repayment each month (so it’s easier to manage);
- Saves you money – with all your debits on lower interest rates, it may lower the overall interest you are paying.
How does this work?
You will need to increase your home loan (borrow more) to pay off all your other debts and then close those other debts/accounts.
Often it means your home loan term, will increase again.
This can be done via an internal or external refinance.
These are all things I will assess and can recommend the best option for you.
If you are in this situation, I would recommend you book a free 15 minute call and we can assess if consolidating debts into your home loan is the best option for you.
3. To borrow more money for a home renovation in next 6 to 12 months.
If you love where you live, but you feel your family home is now too small or perhaps it’s in need of a refresh, then you may be considering home renovations.
This could be a new kitchen, bathrooms or a large back deck.
There are several ways to finance a home renovation, and which one is right for you depends on a few factors.
Basically, if you want to do a structual renovation (adding rooms, changing floor plan) for more than $100,000, you will probably need to refinance your current home loan.
If the lender you have your home loan with today, does not actually offer renovation loans at all, you may need to refinance to a new lender who does.
While on the outside banks can seem the same, in reality some banks are better than others when it comes to borrowing for a renovation.
For example, a renovation loan with a good bank will offer you these benefits:
- Allow you make interest only repayments while you are renovating.
- Only make repayments on the loan that is ‘drawn down’ (which saves you money).
- Will allow you to use more equity in your home to finance the renovation.
- Are more likely to approve your home loan (as they want your business).
- May give you a higher property valuation which allows you to borrow more.
So if you do want to borrow more money to renovate your home, we will first consider your existing bank and check how suitable they are for construction loans.
Some questions we consider are:
- What is the maximum Loan to valuation ration (LVR) they will allow?
- What do they value your home at now versus the value of your home when the renovation is completed?
- Interest rates and fees/charges offered on the loan (technically called a construction loan)?
- What are the steps you need to take to prepare to get the renovation loan approved with the bank.
If your existing bank is not a good match for you, we will consider the other lenders to refinance your home loan too, which we know from experience are good to deal with when it comes to renovation / construction loans.
- Find out if your existing lender offer construction loans or if you need to refinance.
- Find out what your borrowing capacity is before you spend too much time getting quotes for the work.
I can help you with this so please book a free 15minute call at a time that suits you.
4. For a better interest rate.
When I talk to people about refinancing the one thing – actually the first thing – they talk about or think about is getting a lower interest rate.
In reality, the interest rate needs to be considerably lower than what you are on now, to make the time involved and the break fees you pay, worthwhile.
Refinancing only to switch to a rate that is 0.10% lower, for example, may not actually save you money.
With this period of rising /higher rates, we have this great article here on switching to a lower variable rate home loan to save more or you can watch it on you tube.
So before you launch into switching lenders, I recommend you:
- First talk to your current lender to see if you can get a better deal;
- Work through the calculations to determine if you will actually save money.
Some questions you will need answers for are:
- Is your LVR with the new bank more than 80%?
- Will you need to pay Lenders Mortgage Insurance (again)?
- What are the break fees and penalties with your current bank?
- What are your financial goals for the next few years and how does that impact which home loan you choose.
If you are a client of ours, we do this assessment for you and recommend the best path to save you money.
5. Going through a separation with your partner.
If you and your partner own a home together but you are formally separating or divorcing then sorting out your home will be a priority.
Currently, the property title and the home loan will likely be in joint names.
In a separation, the options are usually to sell the home or one party buys the other party out.
If one party decides to keep the home, then they take over the existing loan, and will need to increase the loan to pay out the ex-partner.
The property will then move to being on a single title, with a home loan as a single applicant.
They will have 100% ownership and responsibly for the home loan and property.
When refinancing the home loan to a single applicant, you may also want to consider factoring in legal fees for the transfer of title and other buffers to support you through the separation.
If you would like to discuss your options, please book a free 15minute call with me here.
6. To get out of a fixed interest rate home loan.
Have you locked into a fixed home loan rate for a period of 1 to 5 years, and you now want to get out of it?
You may already know that it can be difficult and costly to get out of a fixed interest rate:
It is especially costly to refinance if:
- A large portion of your home loan is locked into a fixed rate, for example more than 50% is fixed (so the other 50% is variable); AND
- If interest rates have fallen significantly since you fixed your home loan.
In this situation, you are unlikely to save money.
While that sounds contradictory, banks will charge you larger break costs when you get out of the loan, to recover their costs.
The reason why you want to refinance (to save money), is the reason they don’t want you too (as they loose money).
Where as if rates have gone up significantly, you will have a lower break fee as the bank is not loosing as much money.
If you are in this situation, please book a 15min call with me as you really need someone to look into this for you.
- Three best ways to reduce mortgage repayments
- Switch to a lower variable rate home loan
- Reduce your monthly debt repayments using debt consolidation
- Switch to an interest only investment loan to reduce your repayments.
- What is Lenders Mortgage Insurance
- Stamp Duty Rebate in QLD
- Five ways to fund your home renovations
How long does it take to refinance a home loan?
The amount of time it takes to refinance varies considerably depending on a few factors.
Unlike when you are buying a new home, where there is a time pressure, generally a refinance has no strict deadline so they do take longer.
The biggest delay is actually with your current lender, who needs to ‘release’ you so the new lender can take over.
Other factors that come into play are bank queues ( which can be long when they have special promotions) and also how complicated your financial situation is.
1. How long does a refinance take?
If you’re looking to refinance externally, which is changing from Bank A to bank B, allow four to seven weeks at least from when you submit your refinance application to the bank, to when it settles.
If the bank you are switching too, has a good promotion on at the time you’re refinancing (like a super low rate or a cash back offer) then expect them to be very busy with a longer queue.
I’ve seen it take four or five months or longer.
If you’re doing an internal refinance (switching loans / better deal within your current bank), these are usually a lot quicker.
Expect it to take somewhere between three to five weeks in total from when you submit the application to settlement.
How much equity do I need in my home to refinance?
It is better to refinance to a new lender when you have more than 20% equity in your home.
However you can refinance with less than this, you may just need to consider the impact of Lenders Mortgage Insurance
1. Why we recommend having at least 20% equity in your home when refinancing
When you have 20% or more equity in your home, it means you do not need to pay Lenders Mortgage Insurance (LMI).
In banking terms, your Loan to Valuation Ratio (LVR) needs to be 80% or less.
For example you do not need to pay Lenders Mortgage Insurance (LMI) if your home is:
- Valued at $1,000,000.
- You have at least $250,000 in equity / cash.
- Which means your loan is no more than $750,000 (LVR of 75%).
In this example, the Loan to Valuation Ratio (LVR) is 75% (being under the 80% threshold) so you do not need to pay Lenders Mortgage Insurance (LMI).
The benefits to keeping your Loan to Valuation Ratio (LVR) below 80% (i.e. having a 20% deposit / equity):
- Avoid Lenders Mortgage Insurance (LMI) – which is usually several thousands of dollars.
- Get a lower interest rate.
- Get lower fees.
- Lending requirements are more flexible, meaning more banks will approved your refinance.
2. What if I don’t have 20% equity in my home when I go to refinance?
If you have less than 20% of your own equity / cash in your home, there are two things to consider:
First, your options to refinance to a new lender may be limited.
This is because there are less banks who will approve your refinance.
Many banks consider refinancing when your LVR is above 80%, to be too risky.
Banks have calculated that if you only have less than 20% equity in your home (as you have borrowed 80% of the value or more), then you are at higher risk of defaulting / missing repayments on your home loan.
As a result, some major banks just won’t take on a refinance of your home loan if you are in this situation.
If a bank does consider your application to refinance, they really want to see a strong benefits for you and them.
Secondly, if you do find a bank who will accept your refinance, you will need to pay Lenders Mortgage Insurance (LMI).
The cost of paying LMI probably outweighs any savings you would make from switching to a lower interest rate (although I would need to check this for you).
I would suggest that if you do need to pay LMI to switch to a new bank then consider it a red flag.
I am not saying don’t switch – I am saying you need to look closely at the costs V savings V your financial goals to see if it is worthwhile.
3. Options with less than 20% equity
If a refinance to a new lender is not the best outcome for you, instead, consider these two options:
1. Refinance to new home loan product within your current bank that may have a more flexible or lower rate.
This may be a good option if you are stuck on a high fixed interest rate and you want to move across to a variable rate which is lower, so you can save on your repayments each month.
This would involve contacting them and seeing if they can get you a better deal.
2. Negotiate a lower rate on the home loan product you are already on.
Never underestimate the power of ringing your bank and asking them for a lower interest rate.
Because you are not switching home loan products, you probably do not need to go through the hassle of a full loan application.
I usually handle this for our clients, but if you want to try this yourself please get in touch as I can talk you through the best way to handle the conversation with the bank to get the outcome you want.
4. Do I need a deposit saved to refinance my home loan?
Adding more cash / deposit into your home loan to pay it down is almost always a good idea.
However there are some scenarios where it is very advantageous to add more cash / deposit into your home loan as it actually saves you money in the medium term.
The best example of this is when you want to refinance your home loan to a new lender to both borrow more and take advantage of a lower rate.
But as your LVR will be greater than 80%, as you are borrowing more money (meaning your total loan is more than 80% of the value of your home / you have less than 20% equity), then you need to pay Lenders Mortgage Insurance.
By adding in extra cash, the aim is to bump up your equity / savings so you have at least 20% equity in your property.
This will mean you do not need to pay LMI.
Calculate costs to refinance your home loan to a new lender.
When you switch to a new lender you first need to understand the costs to leave your current lender V savings expected.
Once you know your final net position, you can make a more informed decision on whether the refinance is worth it.
Here is a simple breakdown of how you can calculate this yourself.
What are the costs to refinance?
These are the typical costs you can expect when you switch or refinance your home loan to a new lender.
Many of these costs can be found in your mortgage documents, or you can ring your lender and ask.
As you can see here, the total cost to refinance can easily be over $1,700 depending on your situtaion.
You would want to make sure the savings you get outweigh the costs.
Steps to refinance your home loan
Where to start and what to do next on your refinance journey.
Steps to refinance
- Assess your current home loan.
- Use the information in this Guide to determine if in reality, you will be better off with a refinance. We can help you with this.
- Compare home loans.
- Look at a range of lenders and home loans that may be better suited. We can help you with this.
- Calculate the costs to refinance to a new lender.
- Make sure you have worked out if you are financially better or worse off after a refinance.
- Apply for the refinance.
- You will need to complete a fact find and provide your paperwork like pay slips.
- The lender will complete a valuation on your home to determine it’s market value.
- Refinance approved.
Why you should avoid refinancing to often.
Refinancing to new lenders too often will probbaly cause you issues down the track.
1. It’s not good for your credit file.
Each time you apply for a refinance to a new lender, you are creating a ‘mark’ or enquiry on your credit file.
Many banks consider too many ‘marks’ as a sign that you are a risky person to lend money to.
There’s going to be a point where you’ll be declined for future loan applications because banks will see that you’ve moved around a lot, and changed a lot.
This affects what is called, your credit score.
Every enquiry on your credit file reduces your score.
A bank assessor who is looking at your refinance application, and who has seen you have changed banks three times in eight years, may decide they don’t want to approve your refinance as your pattern of behaviour shows you will likely leave them again in a year or two.
I have seen on multiple occasions, banks declining a refinance application on this basis.
I don’t recommend ever being in a position like this.
As I have said in this Guide, generally a refinance every 2 to 3 years is good, unless you have a major reason or trigger to do this sooner (as mentioned in the chapters above).
2. Honeymoon interest rates always end.
You may refinance to a special low rate now, but what we see, is that in 6 to 12 months time the honeymoon rates ends.
Often you end up back on a rate similar to what you are paying now anyway.
Banks offer these honeymoon low rates as they are always trying to acquire new customers, and so running marketing campaigns offering a low rate to refinance to them, has proven very successful.
So what I am saying is, you may assume that you’re going to save all this money by refinancing to another lender – but in reality it often doesn’t work out that way.
The assumption you will save money is all wrong.
I am just not a fan of refinancing unless you have done the numbers and can see it is worthwhile.
3. Cash back offers to refinance are not always a good deal.
These are another great marketing effort on behalf of the finance industry.
They can be worthwhile, but just be aware of the downsides.
If you are due for a refinance, and the home loan you are refinancing too has a cash back offer, then you may just go for it!
But look closely at the costs of refinancing as often these are almost equal to the cashback offer.
For example, the cashback offer may be $2,000.
And as shown in Chapter 6, it can typcially cost around $1,700 to do so.
So the $2,000 cashback less the $1,735 to refinance leaves you with $265.
Is this effort worth $265?
In this Guide I recommend that before you go for a cash back offer, ask your current bank for a better deal.
And also note you will get another hit on your credit file which effects your ability to borrow money and refinance again in the future when you really need it.
When not to refinance.
There are a few general rules of thumb to consider when it comes to scenarios when you should not refinance.
Avoid refinancing in these situations
The most common ones are:
- If your Loan to Valuation Ratio is more than 95%.
- If you have less than 5 years left on your home loan.
- If you have less than $50,000 in principle to pay off on your home loan.
- If you want to use your equity to buy an investment property – see chapter 3.