Over the past year, lenders have increased their mortgage rates which has left many homeowners with much higher home financing repayments. Other homeowners may have fixed-rate home loans that are about to end. In both cases, choosing to refinance your home mortgage might be a good choice.
Mortgage refinancing is when you pay off your current mortgage by taking out a new mortgage. The new mortgage could be for the exact amount needed to settle the old mortgage or for a higher amount. You could get the new mortgage from the same lender, or from a different lender.
Should you refinance your home mortgage?
Refinancing can benefit you because:
- You’d pay less interest if you switch to a lower interest rate and keep the mortgage amount the same
- You could repay your loan sooner if you keep your installments the same
- You could pay lower monthly installments if you need to keep up with the cost of living
- You’d get the funds to renovate your home if you increase your mortgage
Refinancing may not be a good solution if:
- The value of your home has decreased (or not increased enough), because you could end up paying the lender’s mortgage insurance, which might negate any saving in interest
- Your financial situation has deteriorated, because lenders may be unwilling to offer you a lower mortgage rate
- If the change in interest rate doesn’t cover the cost of refinancing (mostly the change in interest rate will save you more than you’re going to pay for refinancing long-term, but you should check)
- You recently undertook home financing
If you’ve decided refinancing is right for you, follow these steps for a successful mortgage refinance:
1. Check your credit
You can request free credit reports from Experian, Illion, and Equifax. The reports will show you the most recent entries and your credit score. The higher your credit score, the more likely you’ll be offered a lower rate than you’re currently paying.
Note that the reports and credit scores differ between the three credit bureaus because they reflect only those transactions reported to them. Lenders could draw your credit score from any one of the three bureaus.
If your credit score is lower than expected, you could:
- Look for ways to increase your credit score by settling any outstanding debts, or lowering the limit on your credit cards
- Wait until you’ve paid off any buy-now-pay-later accounts and avoid those schemes for a while because they may lower your credit score
- Check that there are no errors on your credit report
If your current home loan is in your and your partner’s names, you would need to check both your credit reports and finances.
2. Get your paperwork in order
Applying to refinance a mortgage is the same procedure as applying for a mortgage and you’ll need the same paperwork, like:
- Three to six months’ payslips
- Three to six months’ bank statements
- Proof of employment
- Details of your property
- Details of your current home loan
3. Talk to a mortgage broker
Once you’re ready to refinance you should contact a mortgage broker to help you find a new mortgage. Your mortgage broker might also negotiate with your existing lender to see if they’re flexible.
Your mortgage broker will offer you deals that have different benefits like points or cashback for refinance offers and mortgage rates.
You would need to compare the offers in detail, including the fees, rates, and benefits before choosing the offer that’s best for you. Fortunately, your mortgage broker will be happy to help you with this.
4. Choose a new mortgage
Once you’ve signed up for a new mortgage, the new lender will arrange to settle the existing loan. You may need to pay any upfront fees like:
- Application fees
- Valuation fees
- Mortgage registration fees
- Discharge fees
- Fixed-rate break costs (if you refinance when your fixed rate still applies)
With refinancing, the fees may be negotiable and certain steps, like doing a valuation, may not require a physical inspection of the home – it could be done by looking at market conditions in your area.
5. Other refinance considerations
If you choose to refinance and increase your loan amount, for example, because you want to renovate your home, your new repayments might be higher than your existing repayments.
If your new repayments are lower, but you can afford to pay a little extra, you could consider keeping your monthly installments the same because you’ll pay off your mortgage sooner and reduce your interest costs.
In conclusion
To summarise, your first step is to decide if mortgage refinancing is right for you. Your next step is to get your finances and paperwork in order. Finally, if you go to a mortgage broker, they will take over and handle the rest for you.
