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Making your home loan work for you

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How to tell if your home loan is the right fit for your current needs

How to make sure that you're getting the best value out of your home loan.

Taking out a home loan is a major financial commitment, probably one of the biggest financial commitments you’ll make in life. As such, it can be a daunting experience for many people. That’s why it’s easy to understand why some take a set-and-forget approach with their home loan.But as an average home loan term can last anywhere between 25 to 30 years, is it smart to stick with the same loan over that entire period?

A lot can change over 25 years; interest rates fluctuate, your financial situation can shift and the property market ebbs and flows. That’s why it makes sense to review your current home loan regularly to ensure it’s still meeting your needs. If you find it’s not, it might be a sign that you need to refinance your loan.

What is refinancing?

Refinancing is when a borrower switches to a new home loan. The new loan can be taken out with the same lender or from a different lender.

Reasons to consider refinancing my home loan

If you are thinking about refinancing your current home loan, it’s important to do your research and make sure it’s the right thing for you. Here are a few reasons why it might be the right time to refinance.

  • Interest rates have decreased, and your current home loan interest rate is no longer competitive.
  • You want to switch to a fixed rate home loan because you foresee a rise in rates in the near future.
  • You want to consolidate your debt into one loan and avoid paying interest on multiple loans.
  • You are looking for an injection of cash for something like a renovation.
  • There’s been a major change in your financial situation and your current home loan, along with its features and facilities, are no longer suitable.

Reasons refinancing may not be appropriate

There are situations when refinancing may not be the best move. Such as:

  • You’ve only recently taken out your home loan. If this is the case, the exit fees and new establishment fees might be higher than the interest you’d save.
  • This also stands true for anyone close to paying out their home loan.
  • If your credit history has worsened since you last applied for a home loan. This could make it more difficult to obtain approval for a new loan.
  • If you don’t have a regular income stream, e.g. if you’re a freelancer. Again, this can make it more difficult to obtain approval and you may need to provide certain documentation to show your ability to service a loan.

What are the steps to refinancing my home loan?

Step 1: assess your current home loan

The first step is to look into your own home loan. Check how much interest you pay, your remaining balance, how much longer you have left before you pay it out and what the exit fees would be if you were to switch. This will help you determine if it’s the right time to refinance. Also, take into account the features and facilities of your loan that you like and don’t like.

Step 2: assess your current financial situation

If you’re going to refinance your home loan you need to consider if you’re an ideal applicant. Just because you were approved once, doesn’t guarantee you’ll be approved again. Think about things like your credit history, your income and expenses and the value of your home now.

Step 3: compare loans

Do your research when it comes to home loans and make sure you compare products from your current lender as well as across different lenders. If you need help accessing this information in one place, consider using a comparison website like RateCity, Mozo, Finder.com.au or CANSTAR. Be sure to look at the comparison rates of different home loans so you’re comparing apples with apples.

Step 4: approach a lender

Once you decide on a lender and loan type, it’s time to apply. You’ll need to supply your personal details and get all your relevant paperwork and supporting documents in order. Most lenders require standard documents, such as:

  • Verification of your income, such as a payslip or tax return, and expenses, such as 3 months’ worth of bank account statements.
  • Copies of the last 6 – 12 months of your loan statements.
  • Identification such as a driver’s licence, passport, etc.

Here is our supporting document checklist to help make it easier. 

Step 5: valuation

If you receive conditional approval on your application, the lender will need a valuation report of the property to confirm how much it is worth. If your loan amount is within the allowable Loan-to-Value Ratio (LVR), your application should proceed.

Step 6: formal approval

Once your financial information has been verified and the property valuation has been conducted and accepted, you will receive formal approval of your application. At this stage, your new lender (if you decide to switch to a different lender) will notify your current lender that you wish to move your loan. You may also need to sign discharge documents for your old lender at this point. This is a formal notification to your old lender that you're refinancing over to a new one and you want them to discharge the mortgage over your property.

Step 7: contract issued and completion

From here, you are issued with a contract that sets out the terms and conditions of the loan. Make sure you fully understand this document before signing it. You should understand exactly what you have agreed to borrow, your repayment amount, the regularity of your repayments and the length of the loan. Once you are confident you have understood this contract, all that needs to be done is to complete the appropriate paperwork, sign the contract and return these to your lender.

Step 8: settlement

Settlement day is when your old home loan ceases and your new one gets drawn down. The funds from your new home loan are used to pay off your old home loan and the old account is officially closed.

At this time, your new lender will also take ownership of your property’s title by registering their interest.

Your new lender will advise when your first repayment is due on your new home loan.

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