There are a number of reasons why someone may consider refinancing their home loan. Perhaps their circumstances have changed and they could be eligible for a better rate, they may want to access their equity or perhaps they’re looking for a different structure to their loan. Whatever the reason, in many cases it can be quite simple to refinance.
8 steps to refinance a home loan
1. Consider your goals. Think about why you want to refinance. Is it to get a lower interest rate? To change your loan structure? To cash out equity to buy an investment property? To do something else? Once you get clear on your goals, you’ll be better able to assess your options.
2. Calculate your equity. Estimate how much equity you have in your property. Equity is your outstanding debt expressed as a share of the property’s value – for example, if you owed $400,000 and your property was worth $1 million, your equity would be 60%. The more equity you have, the more lenders may want to do business with you as their risk is lower. This can be reflected as a lower interest rate. Generally, it’s a good idea to have at least 20% equity when refinancing to avoid paying lenders mortgage insurance (LMI).
3. Review your credit report. You’re entitled to a free copy of your credit report from Equifax or Experian. Check your credit score – if it’s low, make a plan to raise it (such as by paying down debt and paying your bills on time), as this will make you a more attractive applicant in the eyes of lenders. Also, look to see if there are any incorrect negative listings on your credit file – if there are, apply to have them removed, as this can raise your credit score.
4. Consult your mortgage broker. Your broker can develop an understanding of your situation to run through the options that will help you achieve your goals.
5. Compare home loans. Your broker will compare lenders on your behalf and then present you with a shortlist of options.
6. Apply for the new loan. After you choose your home loan, your broker will file the application on your behalf and manage the process from start to finish.
7. Conduct a valuation. While assessing your application, the lender will order a valuation of your property. This is because they want to make sure the resale value would be sufficient in case you defaulted on the mortgage and they had to sell your home to recoup their money.
8. Settle on the new loan. Assuming the valuation stacks up, the lender will formally approve your loan. At that point, your old mortgage will be closed (as it will be paid off by your new lender) and you’ll start making repayments on your new loan.
