What Is Refinancing? Can It Help You Save on Your Home Loan?

You probably spent a fair bit of time comparing home loans before buying your property. Looking at interest rates, calculating repayments, checking what different banks had to offer. It was an important decision, so naturally, you wanted to get it right.

But that was then. What about now?

If you've been paying the same mortgage for several years, there's a possibility you're paying more interest than you need to. Banks change their rates, new loan products come onto the market, and your own financial situation might be quite different from when you first borrowed.

Refinancing is one way to see if there's a better deal available. It won't make sense for everyone, but depending on your loan and how much you still owe, the savings can be worth investigating.

First, What Exactly Is Refinancing?

Refinancing means taking out a new home loan to replace your existing one. You can do this with another bank or, in some cases, restructure your loan with your current lender.

The idea is to move to a mortgage that better suits your needs today.

Perhaps your current interest rate is higher than what other lenders are offering. Or you want an offset account, which wasn't something you considered when you originally purchased your home.

Some people refinance because they need access to equity for renovations. Others simply want to bring their monthly repayments down.

Whatever the reason, refinancing involves more than finding the lowest advertised rate. You also need to consider the fees, loan conditions and whether switching will actually leave you better off.

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How Much Could You Save by Refinancing?

Let's put some numbers into perspective.

Say you have $600,000 remaining on your mortgage, with 25 years left to repay it. Your current interest rate is 6.50%.

At that rate, your monthly principal-and-interest repayment would be approximately $4,051.

Now suppose you find a lender offering 5.75% for the same remaining loan term. Your repayment would drop to around $3,775.

That's roughly $276 less each month, or about $3,300 over a year.

For a family with school fees, groceries, insurance and everything else competing for their income, an extra $276 each month could make a difference.

Of course, these figures assume the interest rates remain unchanged and don't include refinancing costs. What you'd actually save depends on your outstanding balance, the rate you're offered and the expenses involved in switching.

It's also worth remembering that a lender's advertised rate isn't necessarily the rate you'll qualify for.

There Are Other Reasons People Refinance

A lower interest rate gets most of the attention, but it isn't the only reason homeowners consider refinancing.

You might want to finish paying off your mortgage earlier.

Say refinancing reduces your minimum repayments, but you decide to keep paying the same amount as before. Assuming your loan allows extra repayments, that additional money can go towards reducing the principal.

Do that consistently, and you could shorten your loan term and pay less interest overall.

You may need different loan features.

An offset account is a good example. If you have savings sitting in a regular bank account, moving that money into an eligible offset account could reduce the interest calculated on your mortgage.

Or perhaps you want access to a redraw facility because you occasionally make larger repayments when your income allows.

These things may not have been important five years ago. They might be now.

You may have built up equity in your home.

Let's say your property is worth $850,000 and you owe $500,000. That leaves you with approximately $350,000 in equity.

Depending on your circumstances, a lender might allow you to borrow against some of that equity.

Homeowners sometimes do this to renovate, make improvements to their property or contribute towards another purchase.

But remember, equity isn't free money. Borrowing against it increases what you owe, and that needs to fit within your budget.

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So, When Should You Think About Refinancing?

There's no perfect time that applies to every homeowner.

However, if you haven't looked at your mortgage since taking it out, that's probably reason enough to review it.

You might also want to explore your options if your fixed-rate period is coming to an end. The interest rate you move onto afterwards could be considerably different, which may affect your repayments.

A change in income is another reason. Perhaps you've received a promotion, changed jobs or reduced other debts. Your borrowing position may have improved, although lenders will still assess your current circumstances.

And then there's property value. If your home's value has increased while your mortgage balance has reduced, you may have more equity than when you first applied.

That could affect which loan products and interest rates are available to you.

You don't necessarily need a major reason to review your mortgage. Sometimes it's simply about checking that you're not paying more than necessary.

What About the Cost of Refinancing?

This is where you need to be a little careful.

Switching home loans can involve fees, and they can eat into the savings you were hoping to make.

Your existing lender might charge a discharge fee. The new lender may have application or settlement fees. There could also be property valuation costs and government mortgage registration charges.

If you're on a fixed-rate loan, ending it early may trigger break costs. These can sometimes be significant, depending on your agreement and market conditions.

You might also have to pay Lenders Mortgage Insurance if your equity doesn't meet the new lender's requirements.

Another thing worth checking is the loan term.

Suppose you've got 18 years left on your mortgage. A lender offers you a lower monthly repayment, but the new loan runs for 30 years.

It might seem like a great saving each month. But you're now paying the mortgage over another 12 years, which could mean considerably more interest in the long run.

This is why comparing monthly repayments alone doesn't give you the full picture.

Working with experienced Refinance Mortgage Brokers can help you understand the costs involved and how long it might take before the savings outweigh those costs.

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Is Refinancing a Complicated Process?

Not necessarily, although there's paperwork involved.

First, you'll need a clear picture of your existing mortgage, including the outstanding balance, interest rate, remaining term and any applicable exit costs.

Then comes comparing lenders.

Once you've found a suitable option, the new lender will assess your application. They'll generally want to see evidence of income, details of your living expenses, existing debts and credit history. A property valuation may also be required.

If everything meets the lender's requirements and your application is approved, the new loan is arranged to pay out your current mortgage.

From there, you start making repayments under the new agreement.

A Refinance Home Loan Broker can help you compare options, prepare the required documentation and deal with lenders throughout the process.

Before Switching, Have You Spoken to Your Current Bank?

It's a question worth asking.

Sometimes your existing lender may be willing to offer a lower interest rate, particularly if you've been making repayments consistently and have built up equity in your property.

You may be able to negotiate a better rate without moving to another bank.

Of course, you'll need to know what other lenders are offering before you can judge whether the new rate is competitive.

This is where a Mortgage Broker Melbourne homeowners can consult becomes useful. Rather than relying on one bank's offer, you can compare suitable products from different lenders and get a clearer idea of what makes financial sense.

And if your existing mortgage turns out to be the better choice, there's no reason to change it just for the sake of refinancing.

Let's See if Your Home Loan Could Be Working Better for You

You don't need to become an expert in mortgage products to work out whether refinancing is worthwhile. But you do need to understand what you're currently paying, what other lenders can offer and how much switching might cost.

That's something we can help with.

At Loan Studio, we work with Melbourne homeowners who want to review their mortgage, reduce repayments or explore options for their next financial move.

We'll take a look at your existing home loan, discuss what you're hoping to achieve and compare suitable options from our lending panel. We'll also walk you through the costs involved, because a lower interest rate doesn't mean much if you're not actually saving money.

You may find that refinancing is worthwhile. You may be better off negotiating with your current lender. Either way, we'll help you understand your options before you make a decision.

Haven't checked your home loan in a while? Get in touch with Loan Studio. Let's find out whether there's a better option available for you.

Disclaimer: This article provides general information and does not consider your individual financial situation, needs or objectives. Home loan rates, fees and eligibility criteria vary between lenders. All lending is subject to assessment and approval.