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Your guide to refinancing your home loan

14 September 2020

Your guide to refinancing your home loan

COVID-19 has given many Aussies the time and motivation to look a little closer at their finances. Whether it’s spending more time at home, the inability to travel very far (if at all), or job insecurity, everyone is looking at ways to save money while we all get through this.

The good news is that refinancing your home loan is one way to potentially save thousands over the term of your loan. And with interest rates at record lows and many lenders offering a range of incentives to switch, now could be the right time to consider refinancing. To help you out, here’s our simple guide to refinancing your home loan.

Why refinance your home loan?

Refinancing your home loan is usually a straightforward process, but before you put the wheels in motion it’s worth checking out the benefits of refinancing.

Save yourself some money

Saving money is probably the number one reason people refinance their home loan. It can be as simple as finding a home loan with a lower interest rate and/or fewer fees. A few percentage points and fewer fees can really save you money now, as well as thousands of dollars over the years. Put a range of interest rates into our home loan rate calculator to see how much you could save over the life of your loan. Just make sure you put in the remaining term of your current loan, otherwise your repayments will be much smaller and you’ll end up paying far more interest over the term of the loan.

Enjoy the rewards on offer

Lenders are offering all kinds of incentives to get you to refinance your home loan with them, from fee waivers, rate discounts and bonus rewards points, to cashback on refinanced home loans and other related products, like insurance. Cashback rewards are certainly a nice bonus when coupled with a competitive home loan rate. And with leading lenders offering around $2,000 cashback, it seems like a good way to upgrade some household items and appliances, while also saving money on your home loan.

Pay your mortgage off faster

Who doesn’t want to be free of their mortgage sooner? So how can refinancing your home loan help you reach this financial nirvana? It’s quite simple really. If you’re refinancing your home loan with a lower rate, the required minimum repayments will usually be lower than what you’ve been paying. However, by keeping your repayments the same you’ll get ahead of the schedule pretty quickly and pay off your home loan sooner.

Access better features

A home loan will probably be the biggest debt you’ll ever incur. And while most home buyers look mainly at the interest rate on offer when choosing a home loan, it’s not the only factor that sets them apart. Comparing the features is just as important when you’re buying or refinancing your biggest asset. Look for features such as $0 monthly account fees and $0 annual fees – these can all add up. If your current loan doesn’t give you the freedom to manage your finances effectively and pay off your loan faster (without penalty), refinancing is definitely worth considering.

Things to ask yourself:

Does the loan come with an offset account facility?

An offset account is an everyday transaction account that’s linked to your home loan account. It can be used to pay off your loan sooner by minimising the amount of interest charged. You'll need to check how much of your linked account is offset against your home loan, as there are 100% or partial offset accounts available depending on the loan. With an offset account, if you have a $300,000 home loan and $10,000 in your offset account, interest will only be calculated on $290,000. It means more of your repayments will go towards paying the principal amount – helping you pay off the loan faster. CUA also offers Multi-Account Offset, so you can offset the combined balances of multiple CUA everyday accounts against your eligible home loan.

Can I make extra repayments?

Every little bit counts when it comes to paying off a home loan. If your loan allows you to make extra repayments, take advantage of it. Even an extra $20 or $30 a week could take a few years off the term and tens of thousands off the total interest you pay over the life of the loan.

When not to refinance

Like any big financial decision, it’s worth noting that there are some occasions when refinancing may not be the very best option for you. This includes if you currently have a fixed rate home loan where the interest rate is locked in for a set term. While they’re great for providing certainty, especially when interest rates are rising, fixed rate home loans usually come with fixed rate break costs. The cost of fixed rate discharge fees and early termination fees can often outweigh the benefits of refinancing, so it’s best to check what these fees are before you consider refinancing.

Apart from a discharge fee that applies to most loans when you exit, you should also make sure your new home loan doesn’t have significant set-up fees that make refinancing or changing loans unattractive. Some of these common fees include an application or establishment fee (up to $600), settlement fee (up to $300) and a valuation fee (up to $300). In an effort to entice borrowers, some lenders may be prepared pay or waive some of these fees so make sure you ask.

Refinancing is a big decision which requires research and consideration. Make sure the new loan you’re considering offers a range of better features that you’ll actually use and the new lender provides better service than your current lender. If you can’t get better features and service, you may be better off sticking with your current lender, or asking them if they can offer you a better deal.

Ready to refinance?

After carefully considering the things we’ve discussed, it's time to take the big steps towards refinancing your mortgage. Here are three steps to help you refinance.

  1. Check the cost of your current home loan, the payout figure and any exit/discharge fees – this could lead to a conversation with your current lender who may be able to offer you a better deal.
  2. Do your homework on what the rates, costs, features and offers are available with a new loan and compare them against your existing loan.
  3. Choose the home loan that works best for you. Once you apply, the lender will organise the exit from your old loan.

The information contained on this website is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

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