Refinancing a Home Loan or Mortgage basically means to take out a new loan (usually with a different bank or lender) and use these funds to pay out the old loan. Typically this is not a difficult process, with the right kind of assistance.

In a recent survey conducted by Mortgage Choice it was found that Home Loan Refinancing accounts for 34% of all the mortgage applications processed in Australia. When you think about it this is a logical step because over time borrowers needs and circumstances change, and they require their Home Loans to adapt with them.

Reasons Why Borrowers Refinance Their Home Loan

Australian Home Loan borrowers often consider refinancing for many varied reasons including:

Debt Consolidation - to reduce both the amount of interest being paid, and the repayments that are required. This also makes it simpler to manage as there is usually only one fortnightly or monthly account to pay afterwards.

Changes in personal circumstances - such as starting a family or getting a new job, or moving out of the property.

Need to access extra funds - if you need to pay for a new car, a big holiday, home renovations, an investment property, buying shares or for education expenses.

Not being happy with the current loan or lender

To change the term of the loan - the borrower may now be in a position to make extra payments and wants to utilize an accelerated payment schedule.

To reduce borrowing costs - say no more!

To switch from a variable interest loan to fixed or vice versa

To minimise tax - where the current borrowing arrangement is inappropriate

To assist in a separation or divorce

To start or purchase a business

Should You Refinance Your Home Loan?

As we have outlined above there are many reasons why Australian borrowers choose to refinance their mortgage. Mortgage Choice has developed a Refinancing Checklist to raise some issues that are not always considered. The aim of the Refinancing Checklist is to help you make an informed dicision.

WARNING!

There are dangers in unnecessarily refinancing or "churning" your mortgage. Churning is a term that refers to a finance provider refinancing a borrower even when it is not beneficial to the borrower and occurs at the expense of the borrower. It is crucial that borrowers fully understand exactly why they are refinancing, and also to calculate the overall savings achieved through this process.

The Costs Associated With Refinancing

Time and some mental exertion are two of the big costs associated with refinancing, but it's pretty difficult to place a dollar figure on these two things. As far as the fees and charges which are payable when refinancing it differs from state to state in Australia, but on an average size loan ($215,000) the cost of refinancing is approximately $1,000. This cost is generally rolled into the new Home Loan so there are no "out of pocket expenses".

Some of these refinancing costs can include the following:

Discharge fees to exit the old loan.

Registration fees for the new mortgage.

Loan Stamp Duty (not applicable in Victoria, Northern Territory and A.C.T)

Account fees

Lenders Mortgage Insurance

Valuation fees

Early payment fees

The most important issue is that you know the genuine costs of refinancing, and the features and benefits of the new loan, so that you can evaluate the benefit refinancing provides.

TIP:

It can pay to ask the new lender if they are prepared to contribute to these refinancing costs. If they are keen to gain new clients they may offer some help.

How To Refinance Your Home Loan

Using the services of a good Mortgage Broker can reduce the time taken to refinance, and also provide some certainty as to the end result. A competent Mortgage Broker will assess your borrowing requirements and assist in comparing your current home loan with one or more alternative offerings. When a refinance is chosen as the most suitable alternative, your Mortgage Broker will do all of the "leg work" required to arrange a suitable refinance. This is at no cost to the client, as brokers are paid for this by the lender chosen.

TIP:

Always keep in mind that it is overall cost and loan suitability which are the most important factors when refinancing, not necessarily just a lower interest rate (although it does help).