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Refinancing: 7 questions you were too embarrassed to ask

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The term refinancing can cause a lot of confusion to many homeowners. Understandably, if you're new to the idea there may be questions you're a little embarrassed to ask on the topic. The first thing you need to know about refinancing is that it can potentially save you a lot of money and make life a lot easier.

There are a lot of things you need to consider before refinancing, in order to ensure you are trading-up and making the best of your home loan. Luckily, here at Lendi, we're ready to answer any questions you might have so that we can help you get the best out of your home loan and never pay more interest than you absolutely need to.

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1. What is the purpose of refinancing?

To refinance means to replace your current home loan with a new one with improved terms and/or a lower interest rate by using the new loan to repay the existing one. There are a lot of misconceptions about what this actually means. When you refinance you might move your home loan to a new lender, or update the terms of your loan with your current lender.

Refinancing is essentially an attempt to get a better deal on your home loan. People refinance for a variety of reasons:

  1. If your home loan is outdated, it can be a good idea to compare your current home loan with other ones on the market. You might save yourself some money by finding a lower interest rate and more flexibility. Scoring a lower interest rate can mean lower monthly repayments, which leads to extra cash flow.
  2. Refinancing can help you benefit from the equity you have built in your house by repaying the principal in part. The amount of equity you have is the value of the property minus the principal amount outstanding. Having enough equity helps you borrow more funds which you can also use to renovate or buy another property.
  3. If you want to change the amount or frequency of your repayments, refinancing can help you to update and change the terms of your home loan. Sometimes your circumstances change and you may require changed terms so that you can repay on time. If you want to set repayments to a particular time in the month like after you get your salary etc. , you can refinance to a loan that permits this.
  4. If you’re growing a family or experiencing lifestyle changes, refinancing might help you find a loan product that better suits your new needs. For example - if your children are starting to grow up and your expenses have gone up significantly, you may want to refinance to a new home loan which lets you reduce your payments and prolong the life of the loan.
  5. Refinancing can also allow you to consolidate credit card or personal loan debt into your home loan, which in turn sees you paying less interest over time. Some borrowers want to refinance so that they can consolidate all of their existing debt into one. By doing so they have to make a single monthly payment and reduce the total amount of interest they were due to pay.
  6. Sometimes borrowers get a big rise in salaries or inherit money which raises their paying capabilities a lot. If your current loan doesn’t offer you features like an offset account or a redraw facility, which can help pay off your loan faster, you may want to consider refinancing your home loan.

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2. What if I have a bad credit score?

Your credit score is a representation of your credit-worthiness based on your credit profile. It is usually a number between 0 and 1000 or 0 and 1200 which helps lenders determine whether or not they should loan you money.

A bad credit score might be the result of any defaults, outstanding debts, multiple credit inquiries, declined loan applications or bankruptcies in your history. Things like these can affect your ability to refinance in the future but do not rule out the possibility completely.

Refinancing with a bad credit score is possible but may entail higher interest rates so it can help to start by trying to improve your credit score. Start by assessing your credit file and pinpointing where you need to evaluate and change your spending habits.

By doing this you can cut back on any existing debts you might owe and work towards improving your credit score. Actively trying to change it will show lenders that you can be financially responsible.

Specialist lending helps borrowers who do not meet certain criteria for home loans to find alternative solutions. Specialist lenders can take a different approach in assessing your creditworthiness by manually examining your credit profile and creating broader loan terms and policies.

Alternatively, it may be a good idea to reconsider the necessity for a refinance, as taking the time to build on your credit score and improve it, can help you in the long run and make the refinancing process an easier one.

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3. How much does it cost to refinance?

It’s important to know that just as with any other financial change, there are upfront fees associated with refinancing. Changing lenders continuously affects your relationship with them as well. When you develop a relationship with a lender or bank then maintaining the relationship has its benefits and may lead to lower costs in the future.

These are some of the additional costs that may be associated:

  • Discharge fee: Usually the cost associated with ending your current home loan - this can range between $100 - $500 depending on your lender. Adding in any government charges can see you paying upward of $1000 in total.
  • Set up fees: Fee for setting up a new loan and associated accounts - between $300 - $1000 depending on your updated terms and new loan conditions.
  • Lender’s Title Insurance: Can be anywhere between $500 - $3000.
  • Lenders Mortgage Insurance: This can avoid being paid if your loan amount is no higher than 80% of its LVR. Learn more about LVR here.
  • Bank valuation fee: Various fees associated with valuing your home etc. - approximately $220 depending on the lender.

The associated costs depend largely on which lender you decide to refinance with and the total cost of the loan itself. Doing the right research and comparing across the market can help to decrease any upfront costs. Contact a Lendi today to help make sure you get the best refinance deal.

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4. How soon can I refinance?

There is no definite time to refinance your home loan. You might refinance within the first year of your home loan approval or 10 years into repaying your home loan. Your reasons for refinancing will be different from the next person, so putting a timestamp on it isn’t necessarily ideal.

It is smart to regularly compare your current loan against the current market rates advertised to ensure your loan is still competitive and you're not paying more interest than you need to.

It can be a good idea to time your refinancing with the equity on your home. Most lenders require you to have at least 20% equity built up (80% LVR) before they consider refinancing your current home loan. If you do not yet have an LVR higher than 80% than you are likely to have to pay Lenders Mortgage Insurance (LMI).

Having a sizeable amount of equity in your home means that you are less of a financial risk to lenders which boosts your chances of being approved for a refinance.

Alternatively, you can wait for your fixed term to end in order to avoid being charged exit fees, assess your current loan terms and begin comparing it with other loans on the market.

Some people also like to keep their eyes on the rise and [fall of interest rates](https://www.lendi.com.au/guides/variable-rate-home-loan/) and make their financial decisions based on the movements in the OCR set by the Reserve Bank of Australia (RBA). However, it’s useful to consider the upfront costs of switching lenders for a competitive deal, as staying put might save you money in the long run.

How long you have to wait before refinancing usually depends on a combination of your refinancing goals, your personal circumstances, features of your current home loan and how much equity you have built up.

How much equity can you access?

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5. Do I have to refinance with my current lender?

No, you don’t need to refinance with your current lender. In some cases, being aware of interest rates offered to new customers and the latest trends in market interest rates can help you. You can use this knowledge to convince your current lender to offer you a better rate.

Otherwise, if for any reason you might think refinancing will work in your favour, you might shop around with other lenders and compare their competitive deals to find yourself a new home loan.

Pros of sticking with your current lender

  • Avoid paying exit fees, discharge and settlement fees
  • Quick and simple rate changes
  • Room for negotiation

Pros of switching lenders

  • Ability to create new home loan terms
  • Possibility of scoring a better interest rate on your loan and paying less in interest over time
  • Features that give you more power over your loan’s finances

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6. How long does it take to refinance?

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Refinancing can take a matter of days for some people or weeks for others. The refinancing process largely depends on how long it takes for you to settle on a home loan that best suits you and the lender you choose to go with.

Generally speaking, what slows the process down is your existing lender’s process of discharging and exiting their deal. The transferring of debts between lenders will take time to complete, but varies according to each lender. Once you have finalised the paperwork, you can begin your new loan term with your new lender.

Some lenders offer a fast refinance or fast track refinance. This process quickens the time it takes for your existing lender to hand over the property titles to your new lender, to deposit the funds and to approve, sign and return your offer. You may qualify for a fast refinance, simply provide your lender with all the necessary documentation and criteria.

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7. What are the steps involved in refinancing?

You can view the steps involved in refinancing here.

  1. You have an existing loan that may seem expensive to you compared to current market prices and you want to improve the terms or features.
  2. Shop around and compare loans to find a new loan product offering better terms and costs or renegotiate new terms with your existing lender.
  3. Apply for your loan online. Simply enter information about your current loan, as well as details on your income and expenses. You can check the status of your loan application 24/7 using Lendi's online platform.
  4. When your new loan is unconditionally approved and then settles. The new loan is used to pay off your existing loan and creates a new obligation.
  5. The new loan has improved terms that suit your current circumstances better.
  6. The first monthly repayment for your new loan is typically due one month after your loan settles.

How much equity can you access?

$

Don't know your property value?
Get a free property report

$

Refinancing can be a big step in your home-owning journey. It’s important to understand how the process of refinancing works so that you get the best out of your home loan.

Got a home loan question? Just ask!

We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a Home Loan Specialist here.

The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: interest rate, refinance, borrowing costs, extra repayments, low interest

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Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856, Credit Representative 518849), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
Lendi is a privately owned and operated Aussie business. Our mission is to provide Aussies with the right experience when choosing a home loan from our panel of lenders including ClickLoans, a related body corporate of Auscred Services. Although Lendi compares over 1600 products from over 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 40% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors. We have an independent and founder led board.
WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years.
EXAMPLE: This example is current as at 20th October 2016. A Click Loans Online Principal and Interest Loan of $150,000 over 25 years has monthly repayments of $767. This is calculated based on the interest rate of 3.69%, comparison rate of 3.69%, upfront fees of $0 and annual fees of $0.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
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