What is refinancing?
Refinancing refers to when you are moving your current home loan to another bank. The most common reason for moving your current home loan to another bank is to get a better interest rate so you can save money and pay off your home loan sooner.
Other reasons why someone would move their home loan to another bank could be related to:
Wanting specific features on the home loan that’s not offered by their current bank. For example, a fixed rate loan with a 100% offset account.
Extending your interest only term or changing your repayments from P&I to interest only.
Extending your loan term to 30 years again so you can reduce the repayment due to negative gearing and tax benefits.
Needing to borrow more money against your property and the other bank has provided a higher valuation of your property compared to your current bank.
The lending policy of the new bank is more favourable to your current situation so you can borrow more money.
Do you have to apply and get approved again when refinancing?
Yes you do. It is not as simple as just moving your current home loan to another bank, you actually have to apply all over again with the new bank and get your home loan approved and sign a new set of loan contracts.
When your new bank has approved your new home loan, they will arrange with your current bank to pay out your current home loan and if the loan amount you have applied for is higher than your current loan, you will receive the surplus funds into your bank account.
Does refinancing your home loan affect your credit score?
Whenever you apply for a loan, whether that’s for refinancing a home loan or apply for a car loan etc, there will also be an impact on your credit score. However, that doesn’t mean it will do any harm to your credit score as long as you don’t go applying with 5 different banks in a short period of time all at once.
Are there costs involved when refinancing my home loan?
There are certainly costs involved when you are refinancing your home loan. Here are a list of costs that will apply.
Discharge fee
This is a cost to discharge your loan, so in other words, this is a fee paid to your current bank for leaving. Discharge costs usually range between $350 to $400.
This cost is also typically charged per property. So if you have more than one property mortgaged to your current bank, then you can expect a discharge fee to apply on each of those properties when you are refinancing it away.
Settlement fee
Your new bank may charge you an upfront and once off settlement fee for the loan so it’s important to include this in your cost benefit analysis to work out whether refinancing will provide an ultimate financial benefit to your situation.
Valuation fee
Most banks don’t charge a valuation fee these days, but there are still banks out there that will charge you a valuation fee for each property that is involved in the refinance.
Valuation fees can range between $99 to $500 depending on the bank and the type of property that is being valued.
So make sure you clarify what the upfront fees are before proceeding with your refinance.
Break Cost
This fee is only applicable if you have a fixed rate home loan and you are wanting to refinance this loan before the fixed period has expired.
Before you decide to refinance your fixed rate home loan, make sure you call your current bank and ask them if there are any break costs applicable and if so, you should include this in your cost benefit calculation to determine whether it’s sitll worth refinancing your home loan.
As a general rule of thumb, if your fixed rate is lower than current variable home loan rates, you are likely to not have a break cost.
A break cost is only applicable if your bank suffers a financial loss as a result of you paying out your fixed rate loan before the expiry date, so if the bank doens’t suffer a financial loss, then they won’t be passing that cost onto you.
Mortgage registration fee
This is a government fee and when you move your loan to another bank, the state government will charge you a ‘discharge of mortgage registration’ to remove the mortgage of your current bank from your property and then charged you another ‘mortgage registration fee’ to register the new bank’s mortgage on your property.
This fee varies depending on each state so for example, NSW currently charges (as of 2024) $165.40 to discharge a mortgage and $165.40 to register a mortgage.
This is charged per property, so if you are refinancing one property, then the total fee is $330.80.
Always remember that you will need to pay this fee twice for each property when you are refinancing.
List of mortgage registration fees for each state:
NSW $165.40
ACT $166
VIC $128.50
QLD $224.32
SA $187
WA $203
NT $165
TAS $152.19
How long does a typical refinance process take?
The average time of refinancing a home loan from end to end is around 4 weeks. This includes providing your mortgage broker with all the required documents, the application process, valuation of the property, signing your new loan contracts and waiting for the new bank to schedule an agreed date to payout your current bank.
What if I can’t refinance but still want a better interest rate?
This is actually more common than you think because interest rates have increased significantly over the last 2 years, trapping many borrowers with their current banks, unable to refinance or move to another bank for a better deal.
Banks are never proactive at offering lower interest rates to their existing loyal customers, so you need to take the proactive approach to contact them and ask for a better rate and let them know that you are considering refinancing to another bank.
You will be surprised what discounts your current bank will be willing to offer you and this is actually something you can do at least once every 12 months to help you keep your interest rate competitive when you are unable to refinance.
