Refinancing your home loan

With the selection of home loans currently available, many people are choosing to refinance their existing loan to take advantage of additional benefits and incentives offered by other lenders.

How does it work?

A new loan is established with either your existing lender or a new lender, with funds from the new loan being used to pay out your existing loan. It is the responsibility of your new lender to ensure your existing debt is settled in full.

Why refinance?

Refinancing is an increasingly popular method of accessing the existing equity in your home. Equity is the difference between how much you still owe on your home loan and how much your home is worth.

There are many reasons why people refinance their home loans including:

• the option to roll all your debts into one.
• to take advantage of a cheaper interest rate or lower fees.
• to take advantage of other features offered by other products.
• to switch from a fixed to variable rate loan, or vice-versa.
• to access the equity in your home to use for renovations, holidays, other investments etc.

When to refinance

Refinancing can be useful and financially rewarding but it can also carry risks. It takes time and costs money, so before you decide to change to another lender, ask yourself if it is really the right thing for you.

• Are you happy with your existing lender? Have they been professional and helpful in all the dealings you've had with them?
• Are you happy with your existing loan? Is the interest rate comparable to other lenders? Could you use some extra features offered with other products?
• Has your financial situation changed? Maybe you've started a new job or become unemployed.

Potential costs and implications

Refinancing an existing loan comes with many fees and charges. These include:

• application, establishment and handling fees when applying for your new loan. These can be substantial.
• early settlement fees on your existing loan. These vary depending on your lender but many fixed rate loans have significant penalties for early repayment.
• valuation fees; still required by some lenders.
• mortgage insurance. Required by many lenders if the loan is more than 80% of the property value.
• Discharge fees on your existing mortgage and registration fees on your new one.
• stamp duty.

Many people also get caught out with the hidden cost of additional interest payments. If you only have ten years left to pay on your existing home loan and you refinance, taking out a twenty year loan instead, don't forget to consider the additional interest that will be charged over the extra ten year period your new loan runs for. These additional amounts can soon add up.

Case studies

Phil and Brenda have an existing home loan. Their property is currently worth around $425,000 and, after ten years of paying their mortgage payments each month, Phil and Brenda now owe just $175,000 on their loan. This leaves the couple with equity of $250,000 in their home.

By refinancing their loan with another lender, Phil and Brenda can not only find a more suitable mortgage with a lower interest rate, they also choose to untie an extra $50,000 worth of equity, money they can use to invest elsewhere.

However, if Phil and Brenda have no immediate use for the extra $50,000, they can place the funds into the offset account (sometimes referred to as special repayments) supplied with the loan, meaning they don't have to pay any interest on the additional amount borrowed. Their basic financial situation has not changed. They still have a home loan of $175,000 to pay off, however they now have a reduced interest rate and $50,000 worth of accessible money they didn't have before.

Accessing equity isn't the only benefit of refinancing. Freda decided to refinance her home loan to consolidate all her debts into one, with a substantially reduced interest rate. By consolidating her personal loan (9.75%), credit cards (15.25% and 17.75%) and existing home loan (7.25%) into a new product with an interest rate of just 7.05%, Freda can make substantial savings over the life of the loan.

If you've decided that refinancing is the answer for you, make sure you research thoroughly all the options available to you. Decide on the type of new loan you require and be clear on the features you need.