Let’s say you bought your Brisbane home five years ago at 4.5%, but you’ve noticed the rates have now dropped to 3.2%. So, how do you take advantage of this significant savings to reduce your monthly mortgage payments?
The solution? Home loan refinancing.
Refinancing offers many benefits, and this blog will explore all of the essentials you need to know. So, if you’re ready to improve your financial homeownership situation with a smart choice, read on!
At Zest Mortgage Solutions, we specialise in guiding homeowners through the refinancing process, offering personalised advice and access to competitive loan options tailored to your needs.
What is Refinancing?
Refinancing in home loans is the process of taking out a new mortgage to replace your existing one. This new loan pays off your existing mortgage from your current lender, leaving you with a potentially lower interest rate, different loan terms, or both.
Refinancing essentially allows you to look at your finances again and find better home loan features and options matching your requirements.
When choosing to refinance, it's important to consider all additional costs involved due to switching, including application process fees, monthly repayments, property valuation fees to assess current worth versus purchase value, and potential early exit charges, break costs or settlement fees from your current mortgage.
What are the Benefits of Home Loan Refinancing?
When you choose to refinance, you get to experience several benefits that impact your financial goals that are aligned with your homeownership journey. Here are some of the top benefits:
Lower Interest Rates
By refinancing, you can secure a lower interest rate, which can significantly reduce your monthly payments. This means more money in your pocket each month, allowing you to allocate funds towards savings or other expenses.
Access to Equity
Refinancing can help you tap into your home’s equity for renovations, investments, or other major expenses. This allows you to fund your projects while potentially increasing your property’s value.
Consolidate Debts
You can use refinancing to consolidate high-interest debts into your mortgage. This often results in a lower overall interest rate, making it easier to manage your finances.
Change Loan Terms
Refinancing gives you the option to change your loan term, such as moving from a 30-year to a 15-year mortgage. This can help you pay off your home faster and save on interest over time.
Switch Loan Types
If you have an adjustable-rate mortgage (ARM), refinancing can allow you to switch to a fixed-rate mortgage for stability. This protects you from potential rate increases in the future.
Eliminate Lenders Mortgage Insurance (LMI)
If your equity has increased, refinancing can help you avoid paying Lenders Mortgage Insurance (LMI) by reaching the 20% equity threshold. This can save you thousands over the life of your loan.
Better Loan Features
Refinancing can provide access to better loan features, such as offset accounts or flexible repayment options. These features can enhance your overall financial strategy and help you manage your mortgage more effectively.
How to Get Approved for Refinancing
Applying and getting approved for home loan refinancing shouldn’t be complicated once you have the right guidance. Here are some key steps to help you get started - and approved - for refinancing:
- Check Your Credit Score: A good credit score is crucial for getting approved for refinancing. Make sure to review your credit report and address any issues before applying.
- Increase Your Equity: Having at least 20% equity in your home improves your chances of approval. It also helps you avoid lenders mortgage insurance (LMI), saving you money.
- Reduce Your Debt-to-Income Ratio: Lenders prefer a low debt-to-income ratio, which shows you can manage your debts responsibly. Pay down existing debts to improve your ratio and boost your approval chances.
- Organize Your Financial Documents: Gather necessary documents like pay slips, tax returns, and bank statements. Being prepared with these documents can streamline the approval process.
- Stable Employment: Lenders look for stable and consistent employment history. Ensure you have a steady job or a reliable income source before applying.
- Shop Around for the Best Rates: Compare offers from different lenders to find the best refinancing rates. This can save you money and increase your chances of getting approved.
- Consult a Mortgage Broker: A mortgage broker can provide expert advice and help you navigate the refinancing process. They can match you with the best lenders and improve your approval odds.
Download our free refinancing guide here
FAQs
Is refinancing suitable for everyone?
Refinancing suitability hinges on your financial circumstances, current mortgage terms, and future goals. You can do a loan health check, assess your finances, and see if it aligns with a type of refinance. Consider costs like early loan termination fees, potential fixed-rate mortgage charges, and extra fees such as stamp duty.
How long does the refinancing process take?
The period of time for refinancing depends on individual circumstances and lender responsiveness. Factors such as the complexity of financial situations, the efficiency of paperwork submission, and the lender's processing speed can influence the timeline. Generally, refinancing can range from a few weeks to several months, with expert assistance from mortgage brokers potentially expediting the process.
Can I refinance with a poor credit score?
Refinancing with a poor or bad credit score can be challenging as it may limit your options and result in higher interest rates or less favourable terms. Lenders typically consider credit scores when assessing risk.
However, some specialised lenders or programs may offer options tailored for individuals with a lower credit history or scores, albeit with higher deposits or upfront costs and stricter terms.
What is the cost of refinancing a home loan?
The refinancing costs vary depending on the loan process and lender's requirements. The costs typically include application fees, valuation fees to assess the property's worth, and potentially legal fees.
There might also be closing costs associated with exiting your current mortgage early, such as exit fees or discharge fees, as well as stamp duty if you increase your loan amount.
What is loan-to-value-ratio (LVR), and why does it matter in refinancing?
LVR ratio compares your loan amount to the appraised value of your home. Lenders use this ratio to assess risk and determine loan terms. A lower LVR ratio typically results in better refinancing terms and may eliminate the need for private mortgage insurance (PMI).
What is cash-out refinancing, and when is it beneficial?
Cash-out refinance loan allows you to borrow more than your current mortgage payment balance and receive the difference in cash. It's beneficial for home improvements, debt consolidation, or major expenses, but it increases your loan amount and monthly repayment terms.
Can I refinance if I've recently changed jobs or had a decrease in income?
Lenders consider stable income as a key factor in refinancing eligibility. Recent job changes or income decreases may impact your ability to qualify unless you can demonstrate stable employment and financial stability.
Takeaway
Refinancing your home loan can really help you out by giving you lower interest rates and smaller monthly payments. It offers an opportunity to review the terms of your mortgage, which might end up saving you cash and lessening risk as time goes on.
If you have further questions or need personalised guidance on refinancing, don’t hesitate to reach out to Zest Mortgage Solutions. Our team of mortgage lending experts is here to simplify the process and help you make the best decision for your financial future.
Contact us at (07) 3461 6499 or click here to book a consultation, and we’ll assist you in achieving your new home and refinancing goals!
