How To Switch Home Loans (Mortgages) In Australia: Explained

Do you struggle to repay your home loan? You can consider loan refinancing to switch to a lower interest rate at your current or a different lender.

It can save you money and offer additional features and benefits. If you're considering looking around for a better deal, this blog is for you.

Find out how to refinance your home loan, compare home loan rates and features, and learn some tips to get the best rate possible.

1. What Is Refinancing?

Refinancing a home loan in Australia is the process wherein homeowners change home loans part way through the loan term to an option that better suits their needs.

They either swap their loan to a different loan amount or loan product with the existing lender or shift to a different lender that takes over the current mortgage.

By securing a more competitive rate, refinancing saves thousands of dollars in interest over the loan term.

2. Key Reasons To Refinance A Home Loan

How could you benefit by refinancing a home loan? Refinancing is a smart move for the following reasons:

• Get a better interest rate, or save on fees

• Reduce your monthly repayment

• Innovative, efficient, and quick process

• Accessing additional home loan features such as a free redraw facility, fixing your interest rate, offset account, and interest-only repayments.

• Get superior customer service.

• Consolidate your household debt into a single loan

• Benefit from a cashback offer from another lender

• You may borrow more based on the changed/new loan conditions.

• Restructure your debt by switching from principal-and-interest repayments to interest-only repayments.

• Access equity built up in their home to meet additional fund requirements for renovations, a new car, a holiday, etc. 

Cons Of Refinancing

• The cost of refinancing to another lender or loan may add up. You must pay for both exiting your current loan and setting up a new one. If you don't do calculations, you may pay more than you could save in interest by chasing a lower rate.

• Refinancing lets you choose a different loan duration. If it is longer than the current loan's term, you may get a low-interest rate but pay more over the loan. To save from losing money, avoid choosing an increased loan term, even if repayments are less.

• Consolidated debt costs you more. 

• Putting multiple refinancing applications without researching could damage your credit history.

3. How Can I Switch My Home Loan?

Follow the step-wise procedure to switch your home loan to a new lender:

Step 1: Review Your Current Loan

• Find features you don't use that could help you save money when negotiating with the lender.

• Calculate the fees that you will have to pay to end the loan prematurely

Step 2: Review Your Financial State 

Before you refinance a loan, check your bank statements and credit score beforehand to prove a robust financial position to the new lender. Lenders use them to determine your creditworthiness and ability to refinance.

Step 3: Check The Loan-To-Value Ratio

Lenders do not pay 100 per cent of the property cost as a home loan because if the property value declines, they won't be able to recover their money. They provide a loan to a certain threshold called the "Loan to Value ratio" to guard themselves against any loss.

Loans with a higher LVR charge a higher interest rate, making them more expensive for the borrower. Ensure the LVR is under 80%; you will need to pay for lenders' mortgage insurance to cover the new loan.

Step 4: Research Available Options To Find A Home Loan

Compare your current home loan with the options below to find a better refinancing deal. 

• Lower fees

• Lower interest rate

• Better features

• More flexible repayment options

• Available offers like cashback

• Loan terms and conditions

Step 5: Talk To The Current Lender 

Before making a concrete move, try negotiating with your current lender to haggle for a better deal. Let them know you have been a loyal customer, have robust financial health, and have found a better deal elsewhere.

To keep your business, lenders may give you some discount on your current rate and fees.

Step 6: Negotiate With The New Lender  

You may settle with the standard loan conditions and make an application or bargain with them a little to get a much better deal.

Feel free to ask the new lender if it can discount the advertised rates and fees.

Step 7: Submit An Application

Submit a formal application with supporting documents, such as bank statements and payslips, to the lender you intend to go with. Multiple credit inquiries can create a significant impact on your credit report.

Step 8: Wait For Approval

The lender will take some time to assess your application and check the authenticity of the documents. It may also order a property valuation to calculate your LVR to make a lending decision.

Step 9: Sign and Confirm The New Loan

On approval, the lender issues a home loan agreement. You need to check and sign it. The new lender will communicate with the old one to settle your loan. Once done, the new lender will determine a schedule of repayments and finish other formalities to start the loan.

4. Refinancing Home Loan Comparison

5. What Documents Do I Need To Switch Mortgage?

• You need bank statements and payslips to prove your earnings and expenditures.

• Unlike traditional home loan applications, you don't need to pay for a deposit in refinancing as the lender considers the equity you own in the property as a deposit.

• If you refinance below 20% of the real estate's value, you must pay Lender's Mortgage Insurance. 

• Note that switching mortgages with the lowest fees, rates, highly flexible benefits, and features requires you to own more equity in the property to apply for them.

• LMI isn't transferable. So, even if you have applied for an LMI when taking out a loan, you need to reapply for it while refinancing.

6. Can I Switch My Home Loan To Another Bank?

Yes. You can switch a mortgage to another loan at another bank that better meets your needs and save you money.

7. Is It Worth Switching Mortgage Lenders And Home Loans?

Switching home loans or mortgage lenders is worth considering if:

• You find a home loan that offers better value than the existing one, and 

• You don't get a competitive deal even after negotiating with the current lender.

Although you may need to pay some refinancing costs, such as application, and discharge fees, you can outweigh those costs with the savings you earn by switching to the right loan.

It is essential to weigh the refinance costs against the savings you expect to make before you make a move.

8. How Much Will You Save By Switching?

It will depend on your current rate and the loan fees to which you are switching. Even a slight reduction in interest rate can add up to thousands of dollars in savings. A home loan repayment calculator helps you quickly work out your savings over the loan term.

This home loan refinances calculator helps you estimate how much you can afford, how much your monthly mortgage repayments could be, etc.

It lets you understand how factors, such as fluctuating interest rates, additional repayments, and your repayment frequency, can impact the interest owed.

9. Do You Have To Pay To Switch Mortgage?

Yes. You will incur a range of costs if you switch mortgages between lenders. The exact refinancing costs depend on your new lender, current lender, and the state or territory in which you live.

• Discharge Fee: Your current lender charges this fee when you exit a loan for any reason.

• Application Fee: Your new lender will charge a fee when you apply for a loan.

• Valuation Fee: Your new lender charges a fee to determine the current value of your property.

• Lenders' Mortgage Insurance: You would need to pay for it if you hold below 20% equity in your property. 

• Break Fees: You need to pay a break fee to refine a fixed-rate home loan during the fixed-rate period.

At Finder.com, you can use a Switching costs calculator to estimate your total switching costs.

10. How Do I Minimise My Switching Costs?

Yes. You can try the following ways to make switching costs cheaper:

• Find a loan with low fees or no upfront fees. 

• Only refinance once you have 20% equity. This way, you can save on paying LMI premiums. 

• The break fee of a fixed-rate loan is smaller near the end of its fixed period. In the case of a large loan, the break fee could eat up the savings that come from switching. To make your refinancing economical, you should wait for your loan to reach its end. 

11. How Easy Is It To Switch Mortgages?

Switching mortgage lenders sounds like a big task, but it is often easier than applying for a new mortgage at a new lender. That's what could make refinancing worth reconsidering.

The process involves seven simple steps:

• Determine your current home loan value.

• Ask your existing lender to offer you a better deal.

• Check out the exit fees if you break the current loan.

• Compare home loans.

• Check the costs involved in moving to the new lender.

• Apply for a new home loan.

• End your old loan.

12. Can I Remortgage My House To Buy Another House?

Yes. If you are purchasing a home and are happy with your existing home loan, you can transfer it to another property without applying for a new one. It is called loan portability.

In this case, the only requirement is that your new property's value should be the same or more than the current home. It should meet any other conditions as set by the existing lender.

A loan portability is worth considering as it helps save money on establishment and exit fees. However, you may need to pay a loan portability fee.

13. How Long Does Switching Mortgages Take?

The refinancing process usually involves a series of steps:

• Gathering documents – to prove your income, expenditures, liabilities, and assets.

• Complete the loan application form and submit it to the new lender

• After approval, the new lender will communicate about settling your current loan with your existing lender.

• At the time of settlement, your current lender pays out your loan, and you will begin repaying the loan with the new lender.

The above-refinancing process could take between fifteen days to two months, based on the intricacy of the home loan and the lenders involved.

14. Dos And Don'ts Of Refinancing

Do's

• Do ask your existing lender for a better deal. To keep your business, your lender may reduce the current loan's interest rate.

• Do shop around. Consult a broker and research online to stay updated on home loan rates and product changes.

• Do thorough research on a loan and ensure you meet the eligibility criteria before applying.

• Do the maths to ensure the new loan still puts you ahead over the long term when considered against its interest rates, discharge fees, and loan arrangement fees.

• Use tools like the Mortgage Switching Calculator to compare home loan costs and decide whether it is worth switching loans.

• Prepare your paperwork (pay stubs, payment summaries, mortgage statements, etc.) to lessen the waiting time and speed up the process.

• Check a lender's online reviews to see how current borrowers rate their service.

• Do ensure your finances are in the best condition before refinancing. Repay as much debt as possible and enhance your repayment history. It increases your likelihood of securing a home loan at a more viable interest rate. 

• Do consider reducing your loan duration when refinancing. Though you may require handling a higher repayment amount but could save much money in interest and help achieve financial freedom soon.

Don'ts

• Only send in one application/ apply for more credit. Multiple home loan application inquiries on your report may mean your past applications are declined. It can reduce your chances of sanctioning a home loan.

• Don't switch jobs. Lenders carefully assess your employment and income to ensure you can repay the loan. 

• Don't rely on honeymoon rates or special home loan switch offers, as they could cost you. Such products revert to a less competitive rate after the offer period. So, look at the home loan and not just the catchy features.

• Refrain from assuming that refinancing a loan with a cheaper rate without doing research would save you money. It is essential to look at establishment fees, ongoing fees, features for the new loan, and closing fees for the old loan to ensure it is cost-effective.

• Remember to pay Lender's Mortgage Insurance if you borrow over 80% of the property's value when refinancing the loan. It is essential if you consolidate your debt into a single home loan.

• Don't refinance what you presently owe. It is because the payout figure on the old loan could be more than the current amount you owe due to the accrued unpaid discharge fees and interest on the old loan.

15. Tips To Consider When Refinancing A Home Loan

Here are a few tips that could make home loan refinancing a lot easier and more effective:

• Know Your Requirements: Have a plan, and understand what you ultimately want to achieve from refinancing. 

• Have an Idea of Your Current Credit Score: To refinance, you must have a good or excellent credit score. It should be the same or better than when you first took on a mortgage.

• Understand The Market Dynamics: The property market and the credit market are highly affected by the economic cycle. When the economy is booming, the interest rates go up. It makes sense to refinance at existing favourable rates.

On the other hand, during the recession, interest rates drop, and it is an opportune time to refinance at a lower rate.

• Take advantage of the free mortgage refinancing calculators online to get an idea of the average interest rate and the possible new loan amount. Make sure you consider the necessary fees involved in getting a new mortgage. 

• Pay attention to the new loan term to avoid signing up for the maximum loan term. Although the repayments may be less, you will require much longer to become mortgage free.

• Do Refinancing only after careful consideration. Don't refinance to chase the cheapest interest rate. Each time you refinance, you incur costs and get inquiries on your credit report that can negatively impact it.

• Borrowing for investment comes with risks. Seek financial advice and invest conservatively to ensure you don't remain with a loan even after your investments exhaust. Ensure that the amount you refinance for and the loan features are sufficient for tax deductibility.

16. Does Transferring A Mortgage Hurt Your Credit?

Sending multiple home loan applications to different lenders would harm your credit score. It happens because, for each loan inquiry you make, that lender requests a copy of your credit report.

Each request leaves a hit on your credit report and can adversely impact your borrowing power, as lenders won't know whether you are disapproved or have changed your mind.

It is best to research a loan application, confirm you meet eligibility requirements, and then submit it to a lender with which you intend to proceed.

17. Conclusion

Refinancing is a good idea to ensure your mortgage suits your current life stage.

Even if it looks cumbersome and time-consuming, you may find the rewards worthwhile. Besides potential interest savings, you could benefit from cashback and access to valuable benefits and features from your new lender.

When choosing a home loan refinancer, don't be tempted to sign up for the first good deal you see. Doing a little research upfront can save much hassle. Contacting a broker can make the refinancing process simpler. Paid by lenders, they can manage the paperwork and coordinate with lenders at no charge.

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