Refinancing is the process of replacing your current mortgage for a new mortgage in order to finance your home. This could be for a number of reasons such as a change in financial position, personal circumstances or getting a better deal on your home loan (lower interest, fees, repayments). However, there are costs to refinancing which is why it is important to ensure you are getting a better deal when you refinance. You can refinance to a different loan and still keep the same lender but it is also possible to refinance to a different lender entirely. While it is easy to understand refinancing on a surface level, it is important to understand the inner workings if you are considering refinancing.
Where does refinancing start?
With a conversation. You tell your broker which loan you are thinking of moving to, and they ask about your employment and financial position to work out which loans you would actually qualify for. That shortlist is the point of the step, not the paperwork that follows it.
The first step in the refinancing process is to reach out to your broker and enquire about the loan you are interested in refinancing to. Your broker will often ask a series of questions related to employment and financial situation in order to determine your suitability for particular loans.
What paperwork do you need to refinance?
Documents confirming your identity and your current financial position. Lenders differ on what they want in detail, so ask your broker for the list before you start negotiating rather than part way through. Getting them together in advance is what keeps the rest of the process moving.
You will then be asked to send documents to confirm your identity and your financial position. It is a good idea to ensure you have these documents prepared prior to beginning your negotiation with a lender to streamline the process.
Why does the lender value your property?
To work out your loan to value ratio. The LVR compares what you owe against what the property is worth, and the lender uses it to decide whether to approve the refinance and on what terms. A valuation below what you expected can change the deal you are offered.
Once the lender is satisfied with the paperwork you have sent through and they have confirmed you are eligible the next step is for them to value your property. This is done so that they can determine the loan to value ratio. LVR is important as it is a factor the lender will use to determine whether your loan will be approved or not.
What happens at refinance settlement?
Your new loan is approved and the lender transfers the property and the debt across. If you are moving to a different lender, the new one contacts your old one to arrange it. Settlement can take weeks, and how long depends on the lenders involved and your paperwork.
If everything goes smoothly up until this point your new loan should be approved and your lender will transfer the property and debt to your new loan. If you are refinancing to a new lender then they will have to contact your old lender to organise the transfer. Depending on a number of factors the settlement process can take weeks and you may have to pay settlement fees.
Is refinancing worth the time and cost?
Only if the new loan leaves you better off once the costs of switching are counted, or it fits your circumstances better than the one you have. Refinancing carries fees, so a lower advertised rate on its own does not settle it. Work the numbers on your actual balance.
While refinancing can be a lengthy process it is worth the time if you can save lots of money in interest and fees by refinancing, or if the new loan better suits your personal circumstances. A mortgage broker can help you streamline this process so you can spend more time enjoying your new home rather than getting bogged down with negotiation and paperwork.
If you would like to learn more about refinancing your home loan, please get in touch with us today