I’m confused about refinancing. Help me!
What is refinancing?
Refinancing is a process of taking out a new mortgage on an existing loan. Normally you do this with the goal to modify the conditions of the loan because of a change in personal or financial circumstances.
Why should I refinance?
Common reasons for refinancing include:
- Seeking lower-interest repayments
- Switching to a fixed, variable or split loan product.
- Using the equity in your home to take out as cash
- Adjusting the term of the loan
- Consolidating debt
How do I go about refinancing?
The process for refinancing is similar to how you received your current loan in the first place. It involves shopping around different lenders to obtain different rates or simply speaking to a mortgage broker to try and find better loan conditions for you.
There are some requirements and checks that need to be met prior to being able to refinance:
- Credit history and score
- Payment history on existing loan
- Income and employment history
- Equity in home
- Home’s current value
- Other debt obligations
Please bear in mind when considering refinancing that the cost of refinancing may be more than the savings provided by a lower interest rate. Refinancing may also impact your credit score; closing your old loan, missing a repayment during the refinance process and making frequent loan enquiries can all negatively affect your credit score and impede your ability to secure a new loan.
To avoid these potential downsides to refinancing your home loan be sure to speak to a mortgage broker or financial advisor who can help provide you with more information and help you to determine whether or not refinancing is the right move for you.
Mortgage brokers, banks and financial advisors. What’s the go?
What’s the difference between a bank and a mortgage broker?
A bank can only offer loans that they themselves provide. A mortgage broker is a qualified professional who is able to compare different loan products from a wide range of lenders to try and secure a product which is best suited to your individual personal and financial circumstances.
A mortgage broker can also guide you through the application process and talk to banks on your behalf to try and secure the best loan for you (sometimes below advertised prices).
What’s the difference between a mortgage broker and a financial advisor?
A financial advisor is a qualified professional who provides a wide range of financial guidance depending on an individual’s personal and financial circumstances and goals. Some of the areas they may assist include:
- Wealth management
- Financial planning
- Trust services
- Investment strategies
A mortgage broker is also a qualified professional who specialises in providing financial advice in procuring and securing loans. They compare different loan products from a wide range of lenders to try and secure a product which is best suited to your individual personal and financial circumstances.
I’m applying for a home loan. What do I need to know?
Which bank is best for home loans?
When it comes to home loans, the bank you select doesn’t matter anywhere near as much as the type of product. You shouldn’t be focusing on which bank you want to work with, what you should prioritise is getting the home loan product that’s best for you.
E.g. If Lender A and Lender B offer identical products except Lender A has an interest rate 1% less than Lender B, then Lender A would be the better choice.
How do you apply for a home loan?
To apply for a home loan you will need to either speak to a mortgage broker or speak directly to a bank. This usually involves an initial consultation or meeting.
They may ask for information and documents pertaining to your goal, identity and your personal and financial circumstances. They will use this information to determine the most appropriate loan for you (a mortgage broker will look at a wide variety of lenders whereas a specific bank will not).
Is a home loan tax deductible?
Unfortunately your home loan is not tax-deductible. This includes the interest on the home loan, principal repayments and extra principal repayments beyond the recommendation.
However, the interest on a loan taken on an investment property is tax-deductible.
What documents do I need for a home loan?
- ONE form of primary identification (passport, drivers licence or other government-issued photo ID), or TWO forms of secondary identification (birth certificate, medicare card, credit/debit card or citizenship certificate)
- A copy of your two most recent payslips
- Your most recent Payment Summary
- (For self-employed only) Personal and business tax returns
- (For self-employed only) Australian Tax Office (ATO) assessments for the last two years
- (For rental income only) A formal signed lease
- (For rental income only) The most recent rental statement
- (For rental income only) Tax return no older than 18 months
What qualifications does a mortgage broker need to hold?
A mortgage broker must hold a Cert IV and a Diploma in Mortgage Broking. This has to be completed through an accredited brokers association. Furthermore, a mortgage broker must also obtain their Australian Credit Licence (ACL).
Who qualifies for or a home loan?
To qualify for a home loan, a party (person, trust or superfund) must be over 18 and pass identity checks. The next qualifying component is determining whether or not the party is able to repay the home loan in its entirety (this varies from person to person). Assuming both of these requirements are met, you are eligible for a home loan.
When should I apply for a home loan?
You should only apply for a home loan if you are seriously considering purchasing a property. Once you have made the decision to purchase a specific property, you may begin the home loan application process.
Can a home loan be paid off early?
To some extent yes. A home loan has a contract length that cannot be breached without incurring an early exit fee. However, you are able to make additional repayments on your home loan to reduce the interest costs over the course of your loan. Lenders will often set a limit on the amount of additional repayments you are allowed to make so it is best to talk to your bank and find out what your maximum additional repayments capacity is.
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