What it means to refinance your mortgage

If your mortgage isn’t giving you what you need, don’t feel bad about changing it. Regularly reviewing your mortgage to make sure it works for you is just part of being smart with your finances. So, are you considering switching but unsure what refinancing is?

What does refinancing mean?

In a nutshell, refinancing means moving your home loan from one lender to another. It’s not a loan transfer, which involves swapping to a different type of home loan, changing your repayments, or splitting and combining loans, all while remaining with the same lender.

Essentially, when you refinance to another lender, it’s considered a whole new loan to them. Because you’re not buying a new home, the process doesn’t involve another vendor or settlement agent, although you do still need to get the property valued.

Before you decide to refinance, it’s worth looking at what your current lender is now offering because there might be a new home loan with more flexible features or add-ons that can help you meet your goals.

Take a look at some reasons to refinance

Consider your current lender before you refinance, as they might have another home loan that can help you reach your goals.

How do you refinance your home loan?

Often, the first step is to talk to a Lending Specialist. They can outline what’s involved in moving your home loan to the new bank, guide you through the steps in more detail and be on call when you need them.

If you decide to refinance to a new bank, the process is like applying for your first home loan. You can start the application process online or with a Home Finance Manager.

Although it’s not a new loan for you, it will be a new loan for the lender you choose. A valuation of your property will be carried out and you’ll usually need to give them statements on your current home loan, as well as a pay out figure. This is the amount remaining on the loan that will be paid out to your current lender.

You’ll also need to organise a discharge with your original lender. This can take a few weeks so should be organised early. A settlement date will be organised, which is arranged between the two lenders to transfer the mortgage title.

Is there any reason I can’t refinance?

There are a few factors that could mean you won’t be able to refinance your home loan.

If you don’t have a high enough loan to value ratio (LVR), there could be insufficient security against the new loan and a lender might not approve it. This would happen if the property value has decreased or a new valuation assigns it at a lower value. In this case, it’s worth talking to your lender to find out what your options might be. They could include paying Lenders Mortgage Insurance (LMI), which is insurance to protect the lender if you have trouble making your loan repayments in the future.

You may also be outside the new bank’s lending policy, or you may not meet the bank’s credit assessment criteria.

You can begin the refinancing process online, or with a Home Finance Manager or Broker.

The costs to refinancing

Discharge costs

Banks will usually charge a fee for you to discharge your mortgage (this is when the bank's name is removed from your property title). The cost varies from bank to bank and usually takes a few weeks to be processed.

Lenders Mortgage Insurance (LMI)

When you refinance your mortgage and your new bank is lending you over 80% of your property's value, you may need to pay LMI.

Breaking a fixed rate loan 

If you're currently on a fixed rate loan at your bank, you may incur a charge to break that term early. The cost depends on how long is left to run on your fixed term and what your fixed interest rate is. Your current bank will be able to provide an estimated break cost. 

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Things you should know

The information contained in this article is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this article without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL / Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this article.