Home Loan Refinance Explained

What is refinancing?

Refinancing, or “Refi”, is a common term we hear being homeowners. Depending on the type of home loan you have, refinancing your mortgage could potentially save you thousands of dollars over the life of the loan. But how does refinance work?  Read more to find out.

In simple terms, refinancing is when you, the homeowner, looks to swap the current mortgage you  have on your  property for a new one. Taking advantage of a lower interest rate is the most common reason people usually consider refinancing their home loan. Another common reason why one may choose to do this is to change up their repayment terms and the loan terms on their property. For example, a homeowner may choose to refinance their home loan when they have an increase in income and would like to contribute more towards their loan and to reduce the total loan term period.

In Australia, most people consider refinancing their mortgage every 3 to 4 years. However, more and more homeowners are looking at refinancing their existing home loans to navigate the current challenges of increasing interest rates and inflation.

What are the common types of refinancing

Every mortgage broker and lender has different types of names for their refinancing, but they all fall under three main types.

Rate-and-term Refinance Loan:

A rate-and-term refinance loan is where the homeowner decides to change the loan type to take advantage of lower rates or to change their loan term that suits the changes in their life situations.

Cash-Out Refinance Loan:

A Cash-Out Refinance Loan is taking equity out of the home as cash, where the amount is added back on to the mortgage. This type of refinance is common where the homeowner requires cash for purchases, for example, a car or another property. Another reason why homeowners may want to do a Cash-Out Refinance is when they want to upgrade their home, such as renovating the kitchen.

Cash-In Refinance Loan:

A Cash-In Refinance Loan is similar to a Cash-Out Refinance Loan, but instead of taking equity out of the home loan as cash, the homeowner would put money in. This type of refinance is common where the homeowners have extra cash and would like to put it towards their home loan to get a better rate, or to pay off their home loan sooner.

How to refinance your home loan – step by step

To ensure that you are well prepared to refinance your home loan, here is an easy 5-step guide to get you on your journey.

1) Ensure you understand the concept of refinancing

It might sound intimidating at first because after all, you are working with your hard-earned money, and  want to ensure you are getting the best value for it. If you haven’t grasped the concept of refinancing, or why you might want to refinance, we recommend re-reading the earlier sections above.

2) Evaluate your current situation

If you have had a change in life events such as getting a promotion and pay raise, decide to upsize or downsize your home, you can consider refinancing your property that meets the requirement to your new change in life situations.

But be careful though. If you decide to refinance without a particular change in life event or change in interest rate, you may end up paying additional fees and spending more money towards your mortgage.

3) Compare which lender has the home loan product that best fits you

Spending time and looking to compare different lenders is a crucial step in refinancing your home. There are many lenders in the market, each offering different home loan products. So make sure you spend the time to compare different products from different lenders.

A great alternative is to speak to a mortgage broker. A mortgage broker will help evaluate your situation and provide recommendations and options for which home loan product best suits your needs and requirements.

4) Have your documents ready
Like applying for your home loan, you will also be required to provide documents in applying for a refinance application. Below are some of the common documentations :

• Personal identification
  Ensure that you have valid IDs

• Income documents  for example, bank statements
  This is to ensure that you are capable of meeting the new home loan repayment requirements

• Property information
  If you are looking to refinance to take equity in or out of the home loan, a valuation report from an independent valuer is usually required.

5) Apply for your new home loan
Once you have all four steps ready, you are now ready to apply for your new home loan. When you submit your application, the new lender will confirm the new settlement date, indicating  when your old mortgage officially moves over to the new one.

How long does it take to refinance a home loan?

The entire refinance process, including research, comparison and enquiries, can take a few weeks to a few months, but once you have submitted an application, it generally takes around 7-10 business days for approval. Some lenders, like Brighten, offer fast turnaround times so you could receive approval within as soon as 2 business days.

Need help refinancing your home loan?

Brighten offers a range of competitive Full Doc and Alt Doc home loan products available to Prime and Near Prime, Resident and Non-Resident borrowers. Our experienced, multilingual team are available when you need them to help you navigate your home loan journey.