Refinance Guide

What is the Fast Track refinancing process?

The Fast Track refinancing process is a way ofswitching to a new lender in a total of three days. It is offered by lenders as a wayto reduce the time between you making the decision to refinance and them closing the deal. The benefit for you as a customer is that you can have the process completed in a matter of days rather than worrying about it for an extended period of time.

A 20-30 minute talk where the new lender will talk to you (usually over the phone) to assess your employment status, your finance andyour overall suitability for a home loan.

You will be required to send to the new lender (by mail or online, depending on the lender) documents that verify your identity, your income and your overall financial status.

Before the new lender approves your loan, the lender will assess the value of your property, often to ensure your borrowing amount is less than 80% of the property value.

• Remote valuation: Some lenders will do a remote assessment using digital means. This allows the lender to conclude the valuation process within hours. On the fast track option, lenders will then be able to pay off your old loan and issue a new one within 72 hours.
• Physical valuation: Other lenders will send a professional to assess the value of your property, which can slightly prolong the process as the new lender will need to coordinate a suitable valuation date with you. When this is done, a valuation fee will need to be paid. Some lenders carry that cost while others will charge you a valuation fee.Most valuation fees will be between $200 to $500.

Following a successful valuation, the lender will approve your loan. On the fasttrack this can be done within 72 hours, whileunder the standard process it can take 9-14 days. The lender will require you to sign and send the new loan documents. Some lenders allow you to dothis online while other require you to send these documents by fax or by post.

Once you send back your loan documentation, the new lender will pay the old lender your outstanding mortgage amount (plus an amount to cover setup and discharge fees). From that moment, your old loan is paid and a new loan is set up. From your standpoint at that stage (72 hours in) the process is done. However the property is still under the ownership of the old lender. It takes up to two weeks for the old lender to change the property ownership to the new lender. The title insurance protects the new lender for instances where for some reason the ownership of the property has not been transferred. Some lenders carry the title insurance cost while others charge you a title insurance fee. This fee is quite expensive and can range between $500 to $3000.

• To reduce their loan costs – Refinancing can save borrowers a huge amount of money on a monthly basis, but also over the life of a loan. If your goal is to reduce yourmonthly repayments, you can use RateCity'smortgage repayment calculatorto see how much you could save each month by refinancing.The actual amount you could save will depend on a number of variables, including:
  • The size of the loan
  • The rate discount
  • Any ongoing and administration fees.

• To pay their loan quicker -Switching to a new home loan with a lower interest rate, but continuing to make the same monthly repayments could save you thousands, even tens of thousands, in interest charges. Itmay also allow you tofinish paying off your mortgage a few years sooner.

• To increase flexibility or features – When you first applied for your home loan, you may have been in adifferent financial position than you are now. Perhaps you've changed jobs, increased your income, or come into an inheritance. If you were simply looking for the lowest rate at the time, you may have missed out on a number of popular features lenders now provide,such as offset accounts, redraw facilities and the ability to make extra repayments. If you can afford to pay down your loan quicker, then thesefeatures may be able to help you save moneyover the longer term.

• To free up some equity – If you’ve paid off a chunk of your home loan, you may be eligible to extend your borrowing amount with a line of credit. The benefit here is that you could pay less interest by borrowing against your home loan than by borrowing on a credit card.Taking on additional debt always carries risks though, so before you go down this path, be sure to speak to a professional, such as a financial adviser, about the pros and cons for your personal situation.

• To consolidate debts – Some borrowers have multiple debts, such as housing loans, personal loans and credit cards.Bycombining those debts into the one account, these borrowers may be able to save on interest charges and fees from month to month, and relieve some of their immediate financial pressure.

• To take advantage of incentives – From time to time, lenders offer incentives to try and hook new borrowers. These incentives can be quite generous and range from cashback offers, to holidays, to new cars. Before you refinance to take advantage of an incentive, it’s important to look at the fine print and make sure the interest rate and fees for the new loan are reasonable and alignedwith your financial goals. It’s worth using a repayment calculator to determine how much more you’ll pay monthly, yearly and over the life of the loan, if your interest rate is higher than your current rate.

• To find a lender that treats them better – It's not unusual for borrowers to feel neglected by their lender. Perhapsthis means not getting a call back whenyou request it, poor customer service at a branch, poor notification of changes, or not passing on interest rate reductions. Feeling disenchanted with a lender is a common reason for refinancing for many Australians. It’s important to make sure before you switch loans that your new lender is an improvement on the old one. For many, that means making sure communication is strong and interest rates and feesare low.

Some of the top refinancing home loans

• The time/effort involved – The main reason people don’t refinance is because they can’t be bothered, due to the perceived effortinvolved versusthe amount they’ll save. A RateCity survey found almost 40 per cent of borrowers cite this as a barrier.
• The chance the new lender will be worse than the old one – Any change is a risk and for almost a quarter of borrowers, the riskthat their new lender won’t be any better than their old one is enough of a reason for them to stay put.

• The hassle of unlinking bundled products – For those who have several bank products, including credit cards, transaction accounts and term deposits, all linked to the one lender, it can be a daunting task to either switch them all over to the new lender or to set up a new direct debit to your mortgage. However, many smaller lenders recognise this and have upped the ante on their customer service for bundled products. It can be as simple as filling out one form with your new lender and getting them to take care of a lot of the heavy lifting. It’s worth checking before you sign up to any new loan what sort of customer service the lender provides and how they handle mortgage transactions.

• The associated costs – Surveyed home owners cited the switching costs as one of their major deterrents to moving lenders. Their rationale is that the cost ofrefinancingwould outweigh the benefits they receive. However, in many cases, that’s not correct. Exit feeswere banned in 2011, which means borrowers now only have to worry about a discharge fee andany upfront fees of their new loan. While discharge fees tend to hover around the $200-$300 mark, the average upfront costs from RateCity’s database of loans is $500-$600. However there aremany loans on RateCity.com.au with no upfront fees at all.

Given that refinancing isn't always a straightforward process, there are certain traps borrowers can fall into if they are not wary.

Here are some of the top offenders:

1. Adding smaller debts to your loan - Paying off a relatively small debt over a home loan's decades-long term mayrequiremany more repayments than you would otherwise make, costing more in total interest charges than paying the debt separately.

2. Borrowing more than you need - It can be tempting to extend your mortgage and borrow a bit extra to spend when you refinance, but over the long term this can cost you more in fees and interest to repay.

3. Falling for honeymoon rates- Honeymoon rates sound great at the beginning, but watch out for a high revert rate.

4. Refinancing to a longer loan term - Your repaymentsmay be lower to start, but you won't pay off the loan any time soon.

5. Accepting upfront fees instead of negotiating - Thiscan make refinancing cost-prohibitive.

While there is no ideal time of year to refinance, reduced interest rates tend to follow a Reserve Bank interest rate cut. For example, in 2016, several loans listed on RateCity dropped their rates around May. Some home loan specials also tend to appear around the beginning of a new year.

Given the paperwork involved in switching loans, some borrowers like to time their refinancing around holidays or long weekends.

A quick comparison will revealthat some of Australia’s smallest lenders have more competitive interest rates than the Big Four banks. Sometimesinterest rates for comparable loansfrom smaller lenders are up to a whole percentage point cheaper. One of the reasons small lenders are able to offer cheaper rates is because their overheads are lower; some of them are online only, some have limited branches and others have less staff than some of their big bank competitors.

This raises the question of whether you'rehappy to sacrifice the customer service and branch access from a larger bank in exchange for a cheaper rate. Ultimately, thiscomes down to individual preference. Many borrowers would prefer to be able to step into a branch when they need to and are happy to pay a little more for the privilege.

Can I trust a smaller lender?

If you’re worried about whether smaller institutions have looser standards, the good news is small banks and building societies are bound by the Code of Banking Practice and Mutual Banking Code of Practice, which means they have the same rules around disclosing fees and charges and keeping your information secure.

If a smaller lender collapses, itsassets may be bought by another lender, and your home loan would be transferred tothis lender. Your loan amount will remain the same, but there will be a small administrative burden as you may have to change some of your passwords and banking details.

There is also a chance that no new lender will buyyour old lender's loan book, and your home loan will be controlled by the liquidator.

Is refinancing free?

Refinancing, or switching loans, is not free, however many borrowers do it because of the potential to save money over time.

The total cost of refinancing is estimated between $400 and $1200, based on the breadth of establishment, valuation, settlement and discharge fees from the existing loan. It will vary on a case by case basis, which means before refinancing, prudent borrowers should ask their prospective lender for a cost estimate and use a refinancing calculator to calculate how long it would take to recoup those costs.

How often should I refinance?

The frequency of refinancing is a personal choice, based on a number of variables for every individual. As such, there is no ideal equation for whether a borrower should refinance and how often they should refinance.

RateCity data shows home owners with 30-year loan terms tend to refinance every four to five years on average.

Does Australia have no-cost refinancing?

In your research on refinancing, you may have come across the term ‘no-cost refinancing’. No-cost refinancing sometimes occurs in the US and refers to a situation where the lender or the broker covers the associated costs, such as appraisal fees and settlement costs.

Unfortunately, in Australia, we don’t really have no cost refinancing. The typical cost of refinancing is a few hundred dollars. However, it is still very popular, especially for borrowers with lengthy loan terms who can recoup those costs over a few months.

Who should not refinance?

Refinancing is certainly not for everyone; in fact for some borrowers, it will not be applicable or appropriate.

For example, the following borrowers would find little benefit in refinancing:

• Borrowers who are happy with their current rate, fees and level of debt
• Borrowers in the final year of their loan term – This is because the costs of refinancing could outweigh the financial benefit.
• Borrowers with a small loan amount – The fees may be more than the actual loan.

When is a good time to refinance?

While there is no ideal time of year to refinance, reduced interest rates tend to follow a Reserve Bank interest rate cut. For example, in 2016, several loans listed on RateCity dropped their rates around May. Some home loan specials also tend to appear around the beginning of a new year.

Given the paperwork involved in switching loans, some borrowers like to time their refinancing around holidays or long weekends.

Can RateCity refinance for me?

RateCity is a financial comparison website, which means while we provide you with a list of prospective loans and lenders, we cannot refinance for you.

If you wish to outsource the refinance process, a mortgage broker may be able to help.

Will my current lender try to persuade me not to switch?

It is possible that when you tell your current lender you have found a new lender with a better rate and/or fees, your current lender will try to persuade you to stay. After all, your current lender is making money from your business over a long period of time and should want to retain that.

Before you begin the refinancing process, it could be worth speaking to your current lender about whether theyoffer flexibilityin their rates or fees. Lenders are well knownfor negotiating in order to keep customers. It’s often best to go into this process armed with information about comparable loans with low rates or fees and similar features towhat you currently have.

Can I change jobs while I am refinancing my home loan?

Given that the refinancing process can take up to a month from initial investigation to loan transfer, some borrowers could find it coincides with a recruitment process. If this is the case for you, you should definitely let your new lender know early in the application process.

While it varies by lender, most lenders require refinancers to be in a permanent job with the same employer for at least 6 months before refinancing. Any interruption to this could reduce your chances of successfully completing the refinancing process.

Can I refinance if I am on an employment contract?

Some lenders will allow you to refinance if you are on an employment contract, as opposed to in an ongoing role. However, many lenders prefer you to be in an ongoing role because it reduces the risk that you will be unable to meet your repayments.

Do I really need a valuation when I am refinancing?

While some lenders do not require you to get a valuation before refinancing, the majority do. Rare exceptions may include when there’s been a recent estimate of a neighbouring property or a recent valuation of your property. In other cases, the lender will require a professional estimate of your property’s worth in order to establish how much they can safely lend you.

On some occasions, the estimates are done remotely based on current knowledge of the geographical region, property size and condition. In other cases, someone will come to your home to value it.

More burning questions

Will I have to pay lenders mortgage insurance twice?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders mortgage insurance (LMI). LMI protects the lender in the scenario you are unable to repay your loan or recoup your borrowing costs due to low equity. For some borrowers, it’s a charge of up to $30,000.

If you had a deposit below 20 per cent and have held your property for less than five years, there is a chance you could have to pay LMI again, to your new lender, upon refinancing. Before completing the application, ask your prospective lender whether this is the case.

Some borrowers delay refinancing to avoid paying LMI a second time because the financial benefits do not outweigh the costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times, it could impair your credit score. Lenders assess your credit score when you apply for new loans, so if you damage it, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, you should get a copy of your credit report and ensure it’s in good shape for future refinances.

I have a poor credit rating. Am I still able to refinance?

Some lenders still allow you to refinance if you have impaired credit. However, you may pay a slightly higher interest rate, higher fees or lenders mortgage insurance to make up for the risk that you may not be able to repay the loan.

I can't pick a loan. Should I apply to multiple lenders?

You should only apply to one lender at a time because you could end up in a scenario where you are accepted by multiple lenders and expected to pay multiple application fees. Also, making multiple loan applicatiosn (and potentially recieving multiple rejections) could risk lowering your credit score.

If you are having trouble comparing two similar loans, it’s worth making a list offeatures and benefitsyou want froma home loan and numbering them in order of importance. Then, contact the two lenders and find out which of them could deliver you what you want.

Can I estimate the value of the property myself?

Unfortunately, you won’t be able to estimate the value of your home yourself.

Will I be paying two mortgages at once?

No; given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender, can I go back to my previous lender?

If you wish to return to your previous lender, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees.

Before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

I am selling soon. Should I still consider refinancing?

If you intend to sell in the next few months, it may not be the best time to refinance. That’s because the costs associated with refinancing, including upfront fees for the new loan and the old loan’s discharge fee, often take at least a couple of months to recover, even if you move to a loan with a better interest rate and lower fees.

If your current loan is on a variable rate, our switch calculator will automatically calculate for you the following:

1. Discharge fee: The cost imposed by your old lender for closing your loan (usually between $200 and$300).
2. Break even point: How long it will take for the savings on your home loan to make up for the cost of the discharge fee.
3. Net saving value: The amount of money you will save one year after the switch and 5 years after the switch after deducting the switch cost.

If you areon a fixed rate, you should contact yourlender and check related break fees before switching.

Before you go ahead with the refinancing process, you'll need to gather together the relevant information about your current home loan and property. This includes knowing your current interest rate, especially if you are looking to refinance to lower your monthly repayments. You can find this information by looking at your home loan statement, which will either be mailed to you or available through internet banking. If in doubt, you can always call your lender and ask them to look up your rate.

It is also essential to have an idea as to the current value of your property. Real estate sites like Domain.com.au and Realestate.com.au will provide you with an estimate of your property’s value, but for a more accurate estimate you can opt for a private valuation. When you apply for a loan, the bank will complete their own valuation of your property but it is good to have an idea of what your property is worth entering the process.

Before you go down the path of switching lenders, it's important to consider all of the alternatives available for you. Switching home loans may not be for you and there may be better options for your goal and personal situation.

Here are some of the alternatives to investigate:

• Staying with your lender but asking for a discount on your interest rate.
• Some lenders offer re-amortisation or re-casting, whereby you can pay off a lump sum and reset your interest rate and mortgage repayments; it's worth thinking about whether you could save more by putting the money you would spend switching into paying down your principal.

After investigating the other options, the next stage in the journey is to compare the cost of switching home loans.

The switch cost comprises the following components:

1. Your loan discharge costs - These are the costs you'll incur fromyour current lender when you transfer your loan.
2. Your break fee (if you're on a fixed loan) - Because a fixed loan is essentially a contract for a set period of time, you may be charged a big fee if you exit from that mortgage ahead of schedule.
3. Your upfront costs for the new loan - These include loan establishment fees and other charges.

Calculate your break even point based on your refinancing goal

How long does it take to recoup the switching costs?

RateCity analysis found it took borrowers on average between four and six months to recoup their switching costs. If you have only 5 years left on your loan, that may seem significant, but if you have 10 or more years, the impact may become negligible.

Finally, it's time to make a decision about whether refinancing is right for you or not. You'll need the following information to assist you:

• Your switching goal
• The costs of new, prospective home loans
• Your break costs
• Your break even point (how long it will take you to recoup the switch cost)

With the above to aid you, the decision should become fairly clear cut.

The Federal Government banned exit fees in 2011, removing one of the biggest barriers to switching home loan providers. Lenders can still legally charge a discharge fee, which is payable when you come to the end of your home loan, however these fees are relatively small at an average of $200-$300whilemany home loans don’t have them at all.

Break fees are charged when a customer terminates a fixed-rate mortgage. The amount is determined at the time you decide to break the loan and is based on how much your bank stands to lose by you breaking the contract. As a general rule, the more the variable rate has dropped, the higher the fee will be.

An ‘upfront’ or ‘application’ fee is a one-off expense you are charged by your bank when you take out a loan. The average start-up fee is around $500-$600, however there aremany loans on the market with none at all. If the loan you want includes an application fee, try and negotiate to have it waived. You’ll be surprised what your bankmay agree to when they want your business.