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The complete guide to mortgage refinancing

Switching to a better home loan can save you thousands. Here's how to do it right.

When did you last take a look at your mortgage? Unfortunately, the home loan market is incredibly competitive, with many lenders vying for your business. They all try to outdo each other with the best interest rates and the lowest fees or best features, which puts you in an ideal position as a borrower if you are looking to refinance. If you don’t think you’re getting the best arrangement on your mortgage at the moment, you could potentially save thousands by refinancing. But before you do, you need to know the ins and outs of the process and weigh up whether it’s the right time to make a switch.

Our guide answers your questions and walks you through the steps to make sure you get the best deal possible on your mortgage.

What are the benefits of refinancing?

While refinancing is usually a pretty straightforward process, it is admittedly going to take a little work on your part. So before you decide to jump in with both feet, it’s good to weigh up the advantages.

The benefits of refinancing depend on your situation, but they can be pretty significant.

  1. You can save a lot of money
  2. You can repay your mortgage faster
  3. You can unlock equity
  4. You can get your finances back on track
  5. You can unlock better features

1. You can save a lot of money

Saving money is the most common reason people refinance. They’re looking for a cheaper mortgage. A “cheaper” mortgage usually means a loan with a lower interest rate, fewer fees or, ideally, both.

It’s hard to overstate the benefit of shaving a few basis points off your mortgage rate. It can save you tens of thousands of dollars over the life of your loan. Let’s look at a quick example.

Suppose you have a $500,000 home loan at 5.00%. Your monthly repayments are $2,685, and over the life of a 30-year loan, you pay $966,278.92.

Now suppose instead, your mortgage rate is 10 basis points cheaper, at 4.90%. Your monthly repayment is now $2,653. Sure, that $32 a month doesn’t sound like a huge saving, but when you look at it over a 30-year term, you pay a total of $955,308.10. That’s $10,970.82. That extra $32 does add up!

Of course, if you refinance, likely, you’ve already been paying your home loan for a little while, and you don’t have 30 years left on your mortgage term. Nevertheless, there are still some serious savings to be made by refinancing.

Let’s say you’ve been paying your $500,000 mortgage for five years, and you’ve got around $460,000 remaining to pay. If you’re on a 5% rate paying $2,685 per month and refinance the $450,000 to a 4.90% rate at a new 30-year term, your monthly repayment drops to $2,441.34.

Now, there’s one problem with this scenario: while your repayments drop significantly, the extra five years you’d add to your mortgage means you end up paying more in interest in the long run. How much more? Let’s have a look.

In our first example, you’ve been paying your 30-year home loan at 5% for five years. You’ve paid it down to $460,000, and with interest, the remaining 25 years of your loan term would cost you a total of $805,232.43. In other words, $345,232.43 in interest.

If you refinance the remaining $460,000 to a 4.90% rate and a new 30-year term, you end up paying $878,883.45, or $418.883.45 in interest. So the cheaper repayment ends up costing you dearly.

So let’s say instead, you keep yourself on track to repay your mortgage in the original timeframe. Then, you refinance that $460,000 at 4.90% for a 25-year term. Here’s where you start to see the savings. Now you pay a total of $798,714.48, or $338,714.48 in interest. So you save yourself $6,517.95.

2. You can repay your mortgage faster

When you’re making interest payments, the adage is true: time is money. So to save yourself time on your mortgage, you can refinance to a lower rate but keep your regular repayments the same, which takes a bit of discipline, but can result in some serious savings.

If you budget well and you’re comfortable with your mortgage repayment at its current level, refinancing to repay your mortgage faster makes good sense. The more time you can shave off your loan, the more the savings add up.

Let’s say in our hypothetical example that you’re five years into your 30-year, 5% home loan. You pay $2,685 a month, and you have $460,000 left to repay.

Now, suppose you refinance to a sharp rate of 3.95% – certainly feasible in today’s mortgage market – and you keep your monthly repayments steady at $2,685.

Your new rate cuts a fantastic 4.1 years off your mortgage term. So not only do you rid yourself of mortgage earlier, but you also save an incredible $144,700 as a result.

As you can see, if you can manage to maintain your current repayments while getting a better deal on your mortgage, you can maximise savings by minimising the number of years it takes to pay off your mortgage.

You can discover more about how to calculate interest on your mortgage in this guide

3. You can unlock equity

Equity is the difference between the amount you owe on your home and its value. Using the example above, if you take out a $500,000 mortgage and owe $460,000, at a glance, it appears you have $40,000 in equity. However, this oversimplified view overlooks both the amount you paid for your home and the amount it’s grown in value since you bought it.

Over time, your home is likely to increase in value. Of course, the property market can go through peaks and troughs, and your home may lose value, but the predominant trend is for property values to increase over time.

With this in mind, let’s take another look at the example above. In our scenario, you initially take out a loan for $500,000. Then, assuming you had a 20% deposit when you bought your home, it means you purchased it for around $625,000. So, even ignoring any capital growth, once you pay your $500,000 for five years, you’ve built up $165,000 in equity.

Now, let’s assume your home’s value has grown at the cumulative capital city growth rate over the last five years, which CoreLogic puts at 47.3%. That increases your $625,000 home’s value to $920,625. All of a sudden, that $165,000 in equity transforms into $460,625.

How can I refinance to unlock equity?

Infographic explaining how home equity works.

When refinancing, a bank typically assesses your current loan-to-value ratio (LVR) by looking at the value of your home minus what you owe on it. It then generally lends enough to bring your total LVR up to 80%.

For example, in our hypothetical situation above, you have built up $460,625 worth of equity, which means your current LVR is just over 50%. Given that most lenders refinance your mortgage up to 80% of its current value, it means you can borrow another 30%.

$920,625 x 0.30 = $276,187.50.

Why refinance to unlock equity?

One of the standard reasons to unlock equity is to use it to invest, which could mean investing in many asset classes, including property.

Suppose you are the owner-occupier in the situation above, and you refinance your mortgage to unlock $277,000 of equity. You now have a healthy deposit to purchase an investment property. Or, you could choose to invest in another asset class such as shares. If it’s likely that the asset you invest in generates higher returns than the interest you pay on the amount you borrow, it can be a savvy move to refinance to unlock equity.

Alternatively, you can choose to use your equity to renovate your home. A well-planned renovation could add value to your home that outweighs the expense of accessing your equity.

Refinancing to unlock equity to invest in could also deliver tax benefits. For example, if you choose to invest in assets such as an investment property or shares, you can take advantage of negative gearing concessions. Moreover, if you decide to invest in property, you can deduct the interest on your mortgage repayments.

If you choose to use your equity to renovate, you may be able to claim depreciation benefits on the improvements you make. However, regardless of which path you choose, it might be wise to speak to a financial adviser or tax professional to discuss your options.

4. You can get your finances back on track

If you’ve had a rough patch in your finances, refinancing your mortgage may help set you back on the path to financial security. There are several situations where refinancing might help you get your finances in order:

If you have a bad credit mortgage

If your original mortgage was a specialist loan for people with bad credit, odds are you’re paying a high rate. However, if you’ve had your current specialist mortgage for a few years and kept up with your repayments, you may be able to refinance into a traditional mortgage for a much lower rate.

If you want to refinance from a bad credit mortgage, there are usually a few stipulations:

  • You have to pay any defaults, and they must no longer appear on your credit file.
  • You need to have been regularly making your repayments on time for the last six months.
  • Plus, you generally need to have built up enough equity in your home to owe 80% or less of the property’s value.

Lenders don’t mean Bad credit mortgages to be permanent solutions. Instead, lenders intend to help you get yourself back on track after a rough patch. For example, if you are diligent in managing your finances and have had your bad credit mortgage for some time, it could be time to refinance.

If you want to consolidate your debt

Some borrowers might find themselves in a situation where they’re comfortable with their mortgage repayments but struggle to manage their other debt. However, one of the benefits of mortgages is that they charge a low interest rate in comparison to other forms of debt, which is where refinancing for debt consolidation could be a savvy move.

For example, if you have several credit cards, or personal loans charging interest at rates of anywhere from 6.95–29.95% p.a., Imagine potential savings if you refinance that debt onto your mortgage at a rate of 4%. In addition to charging a much lower interest rate, refinancing to consolidate debt means all your debts combine into a single repayment. As a result, you won’t find yourself juggling several bills, and you won’t get hit with fees for all your separate debt facilities.

The one caveat is that consolidating things like credit card debt and personal loans into your mortgage may give you a lower interest rate, but it could also lengthen the loan term. Instead of repaying your credit card or personal loan over a few years, your debt stretches out over 30 years, which will see you pay more interest in the long run.

If you’re in arrears

Being in arrears means that you’ve fallen behind on your mortgage repayments, which is a serious situation, and if it is left unresolved, could see you lose your home.

If you find yourself in arrears on your mortgage, the first thing to do is talk to your current lender to set up a plan to get you back on track. One option you can also explore is refinancing. Sometimes your current lender is happy to alter the terms of your mortgage to get your repayments back on schedule. For example, they may give you a repayment holiday, or your lender may lengthen the term of your mortgage to decrease your repayments.

If your lender isn’t willing to work with you, or the solution they offer doesn’t seem like it is enough, there are mortgage providers who will refinance a mortgage in arrears. Usually, this means a specialist lender. The bad news is they will probably charge you a higher rate. The good news is that it may help you keep your home if you are in extreme circumstances that could otherwise lead to foreclosure.

And there’s more good news.

As mentioned above, most specialist mortgages aren’t meant to be a permanent situation. Instead, they are a temporary solution to help you through a rough patch. So while you might pay a higher rate for a few years, you should eventually be able to refinance again once you get your repayments back under control. Plus, paying a higher rate for a few years is almost always preferable to losing your home.

5. You can unlock better features

Price isn’t the only factor that differentiates mortgages. While many of us only pay attention to the interest rate when comparing our options, it can be just as important to look at the features available on different mortgages.

The right features can give you added flexibility, help you repay your mortgage faster or streamline your banking products. On the other hand, if your mortgage doesn’t have features that allow you to take charge of your finances, it could be time to consider refinancing.

  • Offset accounts. An offset mortgage is a transaction account linked to your mortgage. It lets you minimise the interest your lender charges on the loan and potentially repay it faster. When you calculate interest on your mortgage, your lender subtracts the amount in your offset account. So, for example, if you have a $400,000 mortgage with $50,000 sitting in an offset account, your lender only calculates interest on $350,000. It means more of your regular repayment goes toward paying down the principal or the original amount you borrowed, and you pay off your mortgage faster as a result.
  • Extra repayments. Even if they’re small amounts, making additional repayments can add up to serious savings over the life of your loan. Let’s look at an example: If you have a $500,000 mortgage at 4% interest over a 30-year term, you’ll make monthly repayments of $2,387.08. The total amount you pay over the life of the loan is $859,347.53. Now let’s say that after the first year of your mortgage, you start repaying an extra $100 every month, which might not seem like much, but it adds up over the life of a 30-year loan. You’ll save $28,099.95 and knock two years and one month off your mortgage.
  • Package features. Some mortgages let you bundle together several banking products for a single fee. For example, you can combine your products for one annual fee rather than pay separate charges for your mortgage, transaction accounts, and credit cards. These are usually known as package loans. In addition, package loans typically offer discounts on a lender’s mortgage interest rates, and these discounts can be substantial enough to outweigh the amount you end up paying in fees dramatically.

When shouldn’t you refinance?

There are times when refinancing might be a bad idea, and it’s essential to assess whether or not switching mortgages will hurt you. Here are some situations where you probably shouldn’t refinance.

1. If you have a fixed-rate home loan

If you’re on a fixed-rate mortgage, you should think twice about refinancing if:

  • Your interest rate is locked in. A fixed-rate mortgage locks in your rate for a specific period, typically between one and five years. During this time, no matter what interest rates do, your rate remains the same, and your repayments won’t change, which is excellent when variable rates are going up, and you’re shielded from the increases. Unfortunately, it’s not so great when the rates are on the way down. While it can be frustrating watching rates plummet while you’re trapped in a fixed-rate mortgage that’s no longer competitive, refinancing might not be the answer. That’s because of fixed rate break costs.
  • Discharge fees and early termination fees. If you break a fixed-rate mortgage before the term finishes, there are usually two fees you have to pay: a discharge fee and an early termination fee. A discharge fee is typically a few hundred dollars, so it shouldn’t set you back too much, but an early termination fee can be costly.

2. If the set-up costs outweigh the savings

The fixed-rate break costs are a solid disincentive to refinancing. The good news is that if you’re on a variable rate, there are no early termination fees. However, just because you may not have to pay an early termination fee, it doesn’t mean there’s no cost involved in switching your mortgage to a better one. There are still a few fees you have to pay to exit your old mortgage and set up a new one with another bank. These fees can seriously eat into your refinancing savings, and if they’re too high, they might make refinancing a no-go.

3. If the new loan has high fees

As mentioned earlier, when you leave your current loan, you pay a discharge fee, which is generally the only cost associated with exiting a variable rate mortgage and usually costs about $200. However, when you set up your new mortgage, there are also a few fees you have to consider.

  • Application fee. Many lenders charge an application fee, which covers the initial administrative cost of setting up your mortgage account and can cost about $600, depending on the lender.
  • A settlement fee. You are also likely to pay a settlement fee, which covers the lender’s legal costs to fund your mortgage. Settlement fees aren’t usually very high, typically costing anywhere between $100 to $300.
  • Valuation fee. Before deciding how much to lend you, a mortgage provider wants to know your home’s current value, which means a professional valuer needs to do an assessment, which can cost about $300.
  • Lender Mortgage Insurance (LMI). If you had a small deposit when you first bought your home and haven’t had your mortgage for very long, you might also end up being charged LMI, which is an insurance policy that covers your lender if you default on your mortgage. For example, you pay LMI if you buy a home and have less than a 20% deposit. However, if you haven’t been repaying your mortgage long when you refinance, you may find that the amount you’ve paid still doesn’t exceed 20% of the home’s value. If this is the case, you’re probably going to have to pay LMI a second time, which can cost thousands of dollars.

You rarely have to pay LMI when you refinance, but the other fees are pretty standard. The good news is that some lenders try to woo refinancers by paying some of these costs or by waiving fees. If you do your research and compare mortgages well, you may avoid much of the expenses involved with refinancing.

4. If your new mortgage doesn’t have the features you need

A low rate is pretty enticing, but before you chase a cheap mortgage, you need to make sure it suits your needs. Some low-rate mortgages can offer these rock-bottom interest rates because they skimp on features. That’s fine if all you want is a cheap, no-frills mortgage, but if you want some flexibility, a super-low rate might not be worth the sacrifice. Here are some features you need to look into:

  • Offset Mortgage. One feature that is often missing from a heavily discounted mortgage is an offset mortgage. If you use an offset account wisely, you can save yourself a lot of money in interest. Switching to a low-rate mortgage without an offset account could save you some money in the short term, but it could also mean you no longer have the potential to shave years off your mortgage.
  • Flexibility. Another feature you could miss out on is the flexibility to make extra repayments. While nearly all floating-rate mortgages allow additional payments, most fixed-rate mortgages don’t or severely limit the amount you can make. If you’re switching from a variable rate to a fixed rate, you could lose this flexibility.

    Just because a mortgage lacks these features doesn’t make it the wrong choice, but you have to consider your goals and decide if a lower rate is worth compromising features and flexibility.

    5. If your new lender doesn’t offer the service that you need

    There’s more to a mortgage provider than sharp rates or attractive features. If you need to communicate with your lender regularly, you want to make it as pleasant an experience as possible. Good customer service might not be measurable in a dollar amount, but it can be priceless if you need to solve a problem or ask a question. A lot of this comes down to personal preference. Many low-rate lenders either don’t have physical branches or have very few. If speaking to someone face-to-face is essential to you, you might not want to refinance to a lender that doesn’t give you this service. Therefore, some people prefer to keep most of their financial products together at the same institution. However, some lenders may not offer products like transaction accounts, EFTPOS cards or credit cards. So, if you prefer the ease of having all your banking with the same provider, you might want to think twice before refinancing to a lender that doesn’t offer the services you want.

    Five common refinancing mistakes to avoid

    Once you weigh up all the costs involved and decide that refinancing your mortgage is the best course of action, you’re on your way to getting a better deal. However, before you decide on a mortgage, you need to ensure you don’t fall into any of the common refinancing traps.

    Doing extra research and being a bit savvy can help you get the best deal possible on refinancing and maximise your mortgage savings. Make sure you keep an eye out for these mistakes:

    Mistake #1: Not locking down a fixed rate

    If you opt for a fixed-rate loan, you were likely attracted by a low advertised rate. A fixed rate, of course, offers you the peace of mind that your rate won’t move for the term you choose. However, many people don’t know that nothing stops this rate from moving after you initially apply.

    When you apply for a mortgage, there’s a period from the day you receive approval to the day the lender pays out for your property purchase or refinance. The stage at which the lender pays the funds for your mortgage is called settlement. It can take as long as 90 days to get from application to settlement.

    The problem with some fixed rates is that the percentage a lender offers can change between when you first apply and when your loan settles. In many cases, this means the rate you get on the settlement can be different from the advertised rate that convinced you to apply. That’s a nasty surprise to face on the day your mortgage settles.

    Fortunately, many lenders offer a “rate lock” feature for their fixed-rate home loans, which allows you to lock in the rate on offer when you apply, usually for up to 90 days. Some lenders charge a fee for this, but other lenders offer it as a free feature.

    If you want to choose a fixed rate home loan for your refinance, it’s worth weighing up whether you should lock in your rate and compare lenders offering a rate-lock guarantee.

    Mistake #2: Waiting too long to refinance

    When rates are dropping and you work out that you can get a better deal by refinancing, time can be of the essence. Procrastinating on refinancing your mortgage could see you miss out on some great offers. In a market where rates are dropping, it’s certainly tempting to wait and see if they fall further before you make a move, but gambling on the bottom of the market is a risky proposition.

    It helps to look at it this way: The goal behind refinancing is to get a better deal and save money and time on your mortgage. If you find a better deal, it’s best to refinance than to gamble that there’s another one on the horizon. You’re still coming out ahead.

    You want to make sure you’re getting the best deal available, of course, but a real-life great deal today outweighs an entirely hypothetical one tomorrow.

    Mistake #3: Adding years to your mortgage

    When you refinance your mortgage, you likely have the option to take out a new 30-year mortgage term. Be very wary of doing this. If you’ve been paying your home loan off for a few years, refinancing to a new 30-year term means you extend the time it takes to be debt-free, and you end up paying more in interest.

    In some cases, it might be necessary to add time to your loan term. For instance, if you’re experiencing financial hardship, adding time to your home mortgage could reduce your monthly repayments significantly and allow you to get your finances back on track.

    For example, let’s say you took out a $500,000 mortgage at 4.50% for 30 years. After making repayments for five years, you owe $455,789.59. If you refinance this amount with a new lender for a 25-year term at 4.00%, your monthly repayments are $2,405.83. However, if you refinance to another 30 years, your monthly repayments drop to $2,176.01

    However, if you’re not in financial hardship, those lower monthly repayments might not be worth it in the long run. Using the example above, refinancing your mortgage to a 25-year term sees you pay $265,958.26 in interest. Extending that to 30 years means you end up paying $327,574.02. That’s a $61,615.76 difference. Suddenly, saving a bit of money on your monthly repayments seems a lot less attractive.

    Mistake #4: Refinancing when your home has fallen in value

    When you refinance, you’ll find that your home has risen in value most of the time. You have built up equity, and your loan-to-value ratio (LVR) is lower than when you took out your initial mortgage, which is an excellent position.

    With the way a lot of New Zealand property has performed over the last five or so years, you could be forgiven for assuming that property prices always go up. But, unfortunately, that’s not necessarily the case, especially in the short term.

    If you bought your house with a small deposit, you likely paid lenders mortgage insurance (LMI). When you refinance your loan, your new lender carries out a valuation on your property, which is so they can assess the amount they’re willing to lend you and determine your LVR.

    If you’re fortunate and your house has risen in value, odds are your LVR is much lower than when you initially took out your mortgage, particularly if you’ve been making repayments for a while. However, if your property has fallen in value or even remained the same, you can run into trouble.

    Suppose you had a small deposit when you bought your home, and you haven’t been making repayments for very long. In that case, you may find your property hasn’t risen in value enough to get your equity up to 20% of the property’s value, which means that you could end up paying for LMI a second time.

    As we discussed in the last chapter, the cost of LMI can be high enough to make refinancing unwise. If you had a high LVR mortgage, to begin with, and your home has fallen in value or hasn’t risen enough, you could get stung when it comes time to refinance.

    Mistake #5: Being wooed by “honeymoon” rates

    Lenders often offer rock-bottom rates as a temporary incentive to entice borrowers. For example, they may shave 15 or 20 basis points off their standard variable rate for a one or two-year period, after which the loan reverts to their standard variable rate.

    These offers are commonly called introductory variable rates or “honeymoon” rates. For a one- or two-year period, you are guaranteed a steep discount. However, after that period ends and the honeymoon is over, all bets are off! It doesn’t mean that introductory variable rate loans are a bad deal; on the contrary, they’re often great products. However, it does mean that if you’re refinancing to one of these products, you need to pay close attention to the rate the loan reverts to after the introductory period finishes.

    Rather than paying attention to the introductory rate, look at the lender’s current standard variable rate. If the lender you’re considering has a higher standard variable rate than the lender you’re currently with, the deal might not add up to saving you money in the long run.

    The seven steps to refinancing your mortgage

    Once you consider the factors mentioned above, it’s time to refinance your mortgage. We’ve broken it down into seven steps for you:

    1. Look at the cost of your current mortgage
    2. Ask your existing lender for a better deal
    3. Check out how much it costs to exit your current mortgage
    4. Compare mortgage rates
    5. Look at the costs of moving to the new lender
    6. Apply for your new mortgage
    7. Exit your old mortgage

    1. Look at the cost of your current mortgage

    The first order of business if you’re thinking about refinancing is to look at how much you currently pay. Your interest rate should be listed on your mortgage statement. If your lender has online banking, you can find out your current rate in your account information.

    If you can’t find your statements and don’t have access to Internet banking, you can also check your rate using your lender’s website. If you know what mortgage product you have, you can look at your lender’s current rates for the product, and it should tell you what you’re paying. Of course, this doesn’t work in the case of fixed rates. If you have a fixed-rate loan, you pay the rate that was on offer when your mortgage settled rather than the one that’s on offer now.

    If all else fails, you can call your lender, but you need to have some information handy, such as an account or customer number. Don’t feel bad if you have to call your lender to find out your current rate. Contacting your current lender is a crucial step in the refinancing process, as you’ll soon see.

    There’s one last word on checking out your current mortgage – make sure you find out about any ongoing or annual fees you’re paying as well. These factor into your calculations when you work out how to get yourself a better deal.

    2. Ask your existing lender for a better deal

    Many people miss a big step in the refinancing process: talking to their existing lender about getting a better rate. However, this should always be the first step because your lender is highly motivated to keep you. They have entire teams devoted solely to keeping you as a customer.

    Typically, it costs a bank significantly more to bring in new business than to retain old business. Your current lender doesn’t want you to leave because after paying your mortgage for a few years, you’re a more profitable customer than a brand new mortgage customer.

    You can try to get a better deal in a couple of different ways. One way is to ring and ask. Tell them you’re thinking about shopping around for a new mortgage provider, and ask what kind of deal they’re willing to offer to make you stay. They’re likely ready to negotiate to keep your business.

    If you have a flair for the dramatic, another way to get a better deal is to call and tell your current lender that you’re refinancing your home loan with another provider. Then, you are either transferred directly to the retention team or will receive a call from them within minutes.

    While you might not have thoroughly researched all your mortgage options at this point in the refinancing process, it is good to have a rough idea of some of the rates on offer. Then, if you can quote your lender a lower rate you’d like to be paying, you have a point at which to start your negotiations.

    However, there are a couple of caveats to this step. First, you want to make sure you’re the kind of customer your lender intends to keep. In other words, you need to have made all your repayments promptly.

    Second, you need to be ready to follow through on your threat to refinance with another lender. If your lender calls your bluff and either won’t budge or won’t offer a rate you’re happy with, you should be prepared to make a switch.

    Finally, even if your current lender offers you a better deal, you should still do the thorough research laid out in the steps ahead to make sure it makes sense to stay with them instead of finding a better deal elsewhere.

    3. Check out how much it costs to exit your current mortgage

    As we discussed in a previous chapter, there are some costs associated with leaving your current lender.

    Almost every lender charges a discharge fee, which usually isn’t more than a few hundred dollars, so it shouldn’t seriously eat into your refinancing savings. However, you should still check to see exactly how much you will pay.

    If you have a fixed-rate mortgage, you need to check the break costs, as you are leaving your loan before the term is over. These can run into the tens of thousands but could be as low as a few hundred dollars. However, again, the best way to find out is to call your lender and ask.

    4. Compare mortgage rates

    Now it’s time to take some real action and compare some of the best rates on the market. Right away, you’ll probably find many lenders with significantly cheaper rates than you’re currently paying.

    However, it’s vital to compare beyond the headline rates. Once you take a closer look, pay attention to the interest rate and the following factors:

    • Fees. High annual or ongoing fees could eat into the value you get from a new lender. However, not all costs are a deal-breaker. For instance, some package loans charge an annual fee but give steep discounts and waive other fees.
    • Features. Remember to compare mortgages by examining the features they offer since some of these features can help you shave years off your mortgage. Some features you can look for are an offset mortgage, redraw facilities and split facilities.
    • Flexibility. A suitable mortgage offers flexibility and lets you manage your loan in the best way for your specific circumstances. Some flexible options you might want to include are extra repayments, more flexible repayment frequency (weekly or fortnightly) and loan portability.

    Once you’ve looked into the rates, fees, features and flexibility of different mortgage products and narrowed down your search, it’s time to weigh up the cost of switching lenders.

    5. Look at the costs of moving to the new lender

    You should have already calculated the cost of exiting your old loan. Now you want to look at the up-front costs of moving to your new lender. As we discussed before, there are a few standard up-front fees you might have to pay. For example, you may be charged an application fee, a settlement fee and a valuation fee, to name a few.

    When you’ve looked into these fees, also pay attention to any promotions lenders are running. For example, lenders love to get refinancing business from another lender. They’re usually good loans at lower LVRs from borrowers with a proven repayment track record. Because they’re highly motivated to get this business, lenders sometimes run special deals where they waive fees for refinancers or even offer to pay clients some of the costs associated with leaving their current lenders.

    Once you work out the cost of leaving your old lender and the cost of moving to your new lender, you should have a good idea of how much you’ll save by switching. You should also identify the lender and mortgage product that delivers the most significant savings.

    6. Apply for your new mortgage

    Now that you’ve found the home loan that gives you the best deal and the most significant savings, it’s time to apply. Of course, different lenders have other application processes, with some taking place entirely online and some requiring you to mail or scan and send forms and documents. In general, though, there are few details you need to have ready:

    • Personal information. You need to provide your name, date of birth and contact information. Also, you’ll be asked to produce a valid ID, such as a driver’s licence or passport.
    • Financial information. You must provide details of your employment, income, assets and liabilities. Lenders want documentation on this, so you need to have payslips and bank statements ready.
    • Loan information. Your current mortgage details are required, so your lender can see your repayment history and outstanding loan amount.
    • Property information. Your new lender needs details on your current property. They’ll want to have a valuation carried out to assess its current value so they can determine how much to lend you.

    Once you apply, approval generally takes anywhere from a day to eight business days. However, with some online lenders, it can take only minutes or hours.

    7. Exit your old mortgage

    Now, the easy part. Your new lender communicates with your old lender to discharge you from your original mortgage. They exchange all the necessary documentation and take care of things like the title transfer for you.

    Once this is done, your new mortgage reaches the settlement stage, when the funds are disbursed to pay out your old mortgage. Again, if everything goes according to plan, you should be able to get from application to settlement within a couple of weeks.

    And that’s that. Congratulations! You’ve successfully refinanced your mortgage. Now just make sure to do a health check on your home loan every 18 months or so to make sure you’re still getting a good deal. But for now, pat yourself on the back, you’ve likely saved yourself a massive amount of money.

    The whole refinancing process takes a little time and research, but it’s pretty straightforward for most people. Unfortunately, this isn’t always the case. For some borrowers, refinancing can be a bit tricky. Our final chapter discusses what to do if you find yourself in a problematic refinancing situation.

    Refinancing in tricky situations

    So far, we’ve covered the end-to-end refinancing process, and it’s relatively clear-cut for most people, but what if your situation is a bit outside the norm?

    Refinancing in certain circumstances can be a bit tricky. Fortunately, no matter your situation, there are likely to be lenders out there willing to give you a chance. So here are some everyday challenging refinancing situations.

    Refinancing with bad credit

    If you have some bad marks on your credit file since taking out your mortgage, it can seriously narrow your options when you look to refinance. Fortunately, some lenders specialise in situations just like yours.

    Specialist lenders can help credit-impaired borrowers, even if you have defaults or judgments. Some specialist lenders even help those with discharged bankruptcies. Now, the downside is that you’re likely to pay a higher rate than with a traditional lender. If you’re currently with a mainstream lender and have racked up some bad credit marks, refinancing to a specialist lender is unlikely to lower your rate.

    However, there may be times when it’s wise to take on the higher rate. For example, if you need to extend your loan term to get back on top of your repayments, refinancing to a specialist lender might be your best option.

    There are a few things you want to do if you’re refinancing with bad credit. First, you want to get a copy of your credit report to assess how bad the damage is. The great news is that you can access your credit report for free.

    Once you have your credit report in hand, go through it and ensure it’s accurate. It may have defaults and judgments recorded incorrectly, so if you think a listing has been made in error, make sure to contact the credit provider to get it sorted. Alternatively, some businesses specialise in credit repair and help you get incorrect listings removed in exchange for a fee.

    The next thing you want to do is get on top of your existing debt. If you’re having trouble making payments, contact your creditors to set up a payment plan. Most companies are willing to work with you to negotiate costs you can manage. Finally, you want to speak to a specialist mortgage lender.

    Specialist lenders assess your case individually and work with you to find the best refinancing outcome for your circumstances.

    Refinancing in arrears

    If you’ve been struggling to meet your debt obligations, you’ve likely had trouble paying your mortgage as well. If you’re falling behind on mortgage repayments, the first and most crucial step you must take is to contact your current lender. Be honest with them about the difficulties you’re facing and see if they are willing to negotiate a hardship plan to get you back on track. You may be able to refinance with your current lender to get a longer loan term and reduce your repayments.

    However, if this isn’t an option, you might want to look to other lenders for help. The same specialist lenders who help borrowers with bad credit are often willing to help people whose mortgages have fallen into arrears. However, once again, you may find yourself paying a higher interest rate. Also, if your loan term is extended, it means you pay more in interest over the life of the loan. However, if the options are either paying more in interest or defaulting on your home loan, the choice is pretty straightforward.

    Refinancing in negative equity

    This issue is probably the most challenging refinancing situation in which to find yourself. Negative equity means that your home has fallen in value, and you now owe more than it’s worth. So, for example, if you took out a mortgage with a high loan-to-value ratio (LVR) and you’re in an area where house prices have fallen, you could find yourself facing negative equity.

    Unfortunately, you’re highly unlikely to find a lender willing to refinance your mortgage because lenders require at least some measure of equity to serve as a deposit on a mortgage. So this means your options are limited to negotiating with your current lender. Fortunately, you can get out of negative equity and back into the refinancing market by making a few changes to your financial habits.

    First, you need to start making extra repayments on your mortgage, which can be a big task if you’re already struggling. An easy way to get ahead is to switch to fortnightly repayments, which won’t leave you significantly out-of-pocket but add up to an extra monthly repayment every year. Using this strategy won’t hurt your hip pocket too much, but it helps you escape negative equity more quickly.

    Once you’re back in positive territory, your refinancing options open up, and you can begin hunting for a better deal. For now, unfortunately, you’ll have to put off refinancing.

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