Home refinance loans: what you need to know

Navigating the world of home refinancing can be complex and overwhelming without the right knowledge, so here we will cover everything you need to know about home refinance loans in Australia, empowering you to make informed choices that suit your financial goals before making this important decision.

Key takeaways

  • Australian homeowners have a range of refinancing options at their disposal, so it pays to research which one is best for your specific needs. 
  • How you can achieve better terms on your loan repayments by taking actions such as shopping around for more favourable rates and consolidating other debts into a single, lower interest payment. 
  • An understanding of the potentially unfavourable impacts of refinancing, such as negatively impacting your credit score, or being hit with penalty fees for early settlement. 

For many Australians, achieving home ownership is a dream come true. However, as our lives change, so too do our financial circumstances. This is where home refinance loans can come into the equation.

Refinancing your home loan can be a sensible financial decision as it provides an opportunity to secure better terms, lower interest rates, and access additional funds for various purposes, such as home renovations, a new car, or a holiday. 

Navigating the world of home refinancing can be complex and overwhelming without the right knowledge, so here we will cover everything you need to know about home refinance loans in Australia, empowering you to make informed choices that suit your financial goals before making this important decision.

Understanding home refinance loans

Home refinancing is the process of replacing an existing mortgage with a new one that comes with revised terms, interest rates, or loan amounts. 

Refinancing is a strategic move that aims to save money, consolidate debt, or fund home improvements.

The process typically entails paying off your current loan using the proceeds from the new loan, effectively resetting your mortgage. 

The primary reasons for refinancing include reducing monthly payments, consolidating debt, accessing equity, or securing a better interest rate. Homeowners in Australia can choose from various refinancing options, each with its unique benefits and considerations.

Benefits of home refinance loans

There are a range of benefits to be gained from refinancing your home loan. They include:

  • Lower Interest Rates - One of the main reasons people choose to refinance is to take advantage of lower interest rates, which can result in significant savings over the term of the loan.
  • Debt consolidation - Refinancing can help homeowners consolidate high-interest debts, such as credit card balances or personal loans, into a single, manageable mortgage payment.
  • Access to equity - With a cash-out refinance or HELOC, homeowners can access the equity they've built up in their property to fund various expenses, investments, or home improvements.
  • Change in loan terms - Refinancing allows borrowers to modify their loan terms, such as converting from a variable-rate mortgage to a fixed-rate mortgage for increased stability and certainty around repayments.

Types of home refinance loans

There are three main types of home financing loans to choose from: 

Rate-and-term refinance - This is the most common type of refinancing, where borrowers replace their current loan with a new one that has a different interest rate or loan term. The goal is to save money over the life of the loan or reduce monthly payments.

Cash-out refinance - Homeowners with substantial equity in their property can opt for a cash-out refinance. It allows them to borrow against their home's value and receive the difference in cash, which can be used for various purposes such as home improvements, debt consolidation, or educational expenses.

What to do to prepare for refinancing

Before proceeding with refinancing, conduct a comprehensive evaluation of your financial status. A mortgage broker could be the ideal expert to prepare and navigate this process with you. You should check your credit score, current loan terms, and home equity to determine if refinancing is the right decision. 

The next step is to shop around for lenders and compare their offers. Look for competitive interest rates, low fees, as well as excellent customer service.

Gathering the required documents, such as income statements, tax returns, and proof of assets, is essential for a smooth refinancing process.

Once you've selected a lender, submit your application for the refinancing loan. Be prepared for the lender to conduct an appraisal of your property.

If your application is approved, you will go through the closing process, during which time you will be required to sign the necessary paperwork to finalise the new loan agreement.

Our lending experts can help with this process. Contact us for support.

Potential risks and considerations

While there are a number of benefits to home loan refinancing, you should also be aware of the potential drawbacks of doing so. These include: 

  • Closing costs - Refinancing typically involves closing costs, similar to when you obtained your original mortgage. Ensure that the potential savings outweigh these costs before proceeding.
  • Impact on credit score - The refinancing process may involve a credit inquiry, which can temporarily impact your credit score. However, responsible management of your new loan can improve your score in the long run.
  • Prepayment penalties - Some existing mortgages may include penalties if the loan is paid off early. Review your current mortgage terms to determine if these penalties apply.
  • Resetting loan term - Refinancing to extend the loan term can lead to lower monthly payments, but it may also increase the overall interest paid over the life of the loan.

In summary

Refinancing can be a powerful tool when used wisely, helping you save money and achieve greater financial stability.

Home refinance loans are a useful mechanism for homeowners to improve their financial situation, secure better interest rates, and access funds for various purposes. 

Before embarking on the refinancing journey, it's crucial to assess your financial situation, shop around for the best rates and terms, and consider the potential risks and benefits. 

By understanding the factors involved, conducting thorough research, and seeking professional advice (if needed), you can make an informed decision that aligns with your long-term financial goals. 

Get a home loan health check

Our home loan health check could help you to:

  • find ways to fine-tune your loan
  • get more certainty or flexibility on rate options
  • reduce your repayments
  • pay off your loan sooner.

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Disclaimer: This document has been prepared by IOOF Finance Choice Pty Ltd ABN 74 129 728 963 ACL 385191 (IOOF Finance Choice). The information in this document contains general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document you should assess your own circumstances or seek advice from your financial adviser. You should also obtain and consider a copy of the relevant Product Disclosure Statement before you acquire a financial product to determine if it’s right for you. While IOOF Finance Choice has taken all reasonable care in producing the information in this document, IOOF Finance Choice makes no representations in respect of, and, to the extent permitted by law, excludes all warranties in relation to the accuracy or completeness of the information. IOOF Finance Choice, its officers, employees, directors and contractors exclude, to the maximum extent permitted by law, all liability whatsoever for any loss or damage howsoever arising out of reliance, in whole or in part, on the information in this document.