How does a refinance home loan work?

Refinancing your home loan simply means that you take out a new home loan to replace your old one. Benefiting from a lower interest rate, access to more features and greater flexibility are just some of the reasons why a number of people choose to refinance.  

When you switch home loans you will more often than not have to use some or all of the funds to pay off your old home loan. Depending on what works best for you or what deals are available when you’re looking to refinance, you can either stick with your existing lender or switch to a new one entirely.  

It simply depends on where you can find the best deal to benefit you. If your existing lender has an enticing home loan package that you want to switch to then it’s definitely worth looking into, or if an online lender has a rate that catches your eye, you might want to get more information about that. 

Once you’ve decided which lender/home loan you want to switch to, your new lender will pay out your existing home loan in full with your new home loan.

How much could I save by refinancing my home loan?

Okay, we know the main reason you’re thinking about refinancing is probably
because of the savings on offer - but just how much cash can you put back in your pocket by switching to a better home loan deal?

That will depend on your loan amount, how long you have left on your loan term and what interest rate you’re switching to and from. But to give you an idea, let’s look at an example.

Say you have $400,000 left on your home loan and you’re 10 years into a 30 year loan with an interest rate of 4.20%. If you stick with this loan, your monthly repayments would be $1,956, and over the next 20 years, you’d pay $152,207 in interest.

Now, imagine you refinance that loan to an offer with 3.60% interest. Your monthly repayments would drop to $1,819, and over the next 20 years, you’d pay $125,650. That’s a saving of $26,557. Imagine the luxury holiday you could take with that!

Where to compare refinance home loan rates 

If you’ve decided to refinance your home loan to a better deal, now comes the tricky part of finding the right home loan to switch. Since the goal of refinancing is to save on your repayments, choosing a loan with a lower interest rate is critical. So if you’d like to find out how much you could be saving on your home loan, make our Home Loans Interest Rates page your next stop.

How much does it cost to refinance a home loan?

Despite the fact that the ultimate goal of refinancing is to save you money in the long run, initially there may be some costs involved. These costs will mostly come in the form of fees.

Of course, if you’re staying with the same lender and simply switching to another home loan, you may be able to avoid any additional charges. However, if you’re jumping ship to an entirely new home loan lender or bank, then chances are your old lender may hit you up for a penalty or exit fee.

Below is a list of some of the fees you may have to pay while refinancing:

• A termination/discharge fee. Your old bank or lender may charge you a fee to terminate your existing home loan early. This fee could range anywhere from $0-600. 
• A break fee. You may be charged a break fee, if you’re looking to refinance from a fixed interest rate home loan.
• Application fee. Your new lender or bank may also charge you an upfront application fee, although this is sometimes waived if you have a good enough credit score.
• Registration fee. Another potential cost to think about is the registration fee, which you may have to pay when you move your existing mortgage over to your new lender. The cost for this may depend on what state you live in.
• Valuation fee. Your new lender may wish to have an up-to-date valuation done on your property, meaning that you may have to come up with the fee for the valuer to visit your property.
• Settlement/legal fee. Finally, once everything is settled, you may have to pay a settlement or legal fee.

It’s clear that refinancing your home loan can come with a fee or two to start with, which is why doing your research and figuring out your long term savings is key. Basically you just have to make sure that what you save in the long run, will far outweigh what you have to pay upfront to switch. You can use Mozo’s home loans switch and save calculator to get some idea of what your savings will be.

Will refinancing affect my credit score?

The simple answer is yes - refinancing your home loan could have an impact on your credit score.

But, as Oscar Wilde once wrote “everything in moderation, including moderation.” In other words, unless you’re refinancing all over the shop, multiple times in one year, switching your home loan shouldn’t have a huge impact on your overall score.

When you refinance a loan, your potential new lender will conduct an official check of your current credit report. This is known as a hard pull credit inquiry and will be listed on your credit history. The number of hard pull credit inquiries you have listed on your report can affect your overall credit score, so it’s best to only apply for a new home loan if you’re positive you want to switch.

Too many hard pull inquiries conducted in a short space of time, could potentially have a negative impact on your credit score. The key takeaway is to do your research, be selective and to only apply when you’re positive the new lender and home loan has a lot to offer you.

Is there any reason why I wouldn’t refinance?

Refinancing your home loan is not always the best idea. For starters, you might
already be on the best home loan offer around, in which case, it's unnecessary. But even if you do spy a lower rate when comparing home loans, refinancing may not be a good move, if you:

• Are in the middle of a fixed term. Fixed rate home loans often come with break fees attached. This means, if you pay off or refinance your loan before the fixed period ends, you might get hit with a hefty fee. In this case, you’ll need to weigh up the benefits of refinancing against the cost of the break fee to decide on the right course of action.

• Still have an LVR above 80%. If you took out a home loan with a deposit of less than 20%, you probably remember the sting of having to pay Lender’s Mortgage Insurance. Well, unfortunately, refinancing your home loan when you still need to
  borrow more than 80% of your home’s value will mean you’ll have to pay
  Lender’s Mortgage Insurance all over again.