Refinancing your home loan? Here’s what to expect from the process, what documentation you’ll need, and what our personal experience was like.
My household recently refinanced our home loan, and while our experience will not be the same as everyone’s, it may help you in thinking about what to expect – and what you need to know going in.
How our new loan could save us nearly $50,000
Our old home loan was fixed for 2 years at a rate of 4.89%. When the fixed term was about to end, the variable rate it was going to revert to was 5.19%, which was much higher than the average home loan rates on the CANSTAR database at the time. So we decided to look elsewhere.
After several involved conversations with our existing institution and other banks, we’ve found a new home loan that saves us $168/month in interest repayments. Over the life of our 25-year loan, that could add up to a saving of $49,263 in the end.
That’s worth it for our household.
Find how much you could save with a lower rate.
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The home loan refinancing process
Our first thought was to hurry – quick, find a new home loan before the fixed term ends and we start paying ridiculous amounts of interest!
But at the time, we had a few other expensive and time-intensive things going on – we were leaving for an overseas holiday in a few weeks, and we were also dealing with some major and unexpected bathroom repairs. The right time to refinance your home loan is when you have time to look around, and when you’ve got money set aside to pay the upfront fees on a new loan.
We started by simply asking our existing home loan provider whether they could provide us with a better interest rate. We emailed them the average interest rates available from home loans on CANSTAR’s database for both a variable rate and another 2-year fixed rate term.
The best they could do – I think 4.59% from memory – was around average for variable rates at the time, and we decided that was fine for now until we had time to shop around. We let our 2-year fixed rate term end, reverted to the variable rate of 4.59%, and soon began looking elsewhere for a better rate.
We went through my husband’s financial advisor because the advisor had a list of home loans with an LVR of 85% that would suit our situation. It is not necessary to go through a financial advisor to apply for a home loan; in fact, nowadays you can apply online for a home loan with almost any lending institution. But you still need to do your research first.
We compared several home loans for refinancing on the CANSTAR website. We also Googled the banking institutions where we have our savings accounts, transaction accounts, and credit card, to see whether they could offer us a package deal where you pay one annual fee to cover the home loan and your accounts.
Then we were ready to make some calls. We set up appointments to speak in person with a Mortgage Manager at the three lenders we were interested in. If you’re in a regional area or there’s no branch near you, the initial conversations about how their loans might work for you can happen over the phone – but have them call you.
We had to bring in all of our documentation (see below) and each appointment took more than an hour. At the end of each appointment, we took home a copy of the home loan contract to think over – and pray about the decision, because that’s how we roll – but we didn’t sign anything.
Documentation we needed
To apply for our new home loan, we needed to bring into the branch:
Proof of identity: I used my driver’s licence but my husband had forgotten his, so he emailed them a photo of his passport using his smartphone.
Proof of income: My husband and I both brought in our past 4 payslips. From your first appointment with a mortgage manager to the next appointment where you sign paperwork, weeks or a month might pass – in which case you need to bring in new copies of your latest payslips.
Proof of current loan: We had to bring in several of the latest statements for our current loan.
Proof of other liabilities: Bring in your latest credit card statements. If you have a car loan, personal loan, or business loan, you must tell your lender about it when applying for a home loan, so bring in your latest statements.
List of assets: The bank will want to know how much you own in assets. Whether that’s your savings account, a share portfolio, or your bomb of a car, try to know the current market value of the things you own.
Customer number: If you’re applying for a loan at a bank where you already have an account, bring in your customer number so they can attach that to your application. Make things easy for the bank and the application process will go easier for you!
As for things that aren’t legally required, bring with you a written list of requirements you have for a home loan, so that you can talk the mortgage manager through each one and not forget any during the discussion.
Don’t be afraid to ask questions
Always write down any questions you have when Googling their list of products, so that you can find out information not on their website, such as, “Can we attach an offset account to your 2-year fixed rate loan?”
I’m not going to say that we avoided any major traps in choosing our new home loan, but I certainly made sure I asked as many questions as I thought of. To be honest, I was shocked at how some mortgage managers tried to portray their home loan products as being better for the consumer than they really are. Don’t let anyone try to pull the wool over your eyes.
You’ll want to have a good base of knowledge on which to draw when someone says something that sounds odd or just plain fishy. Make yourself familiar with some of the main features of home loans, and perhaps read some of the articles on the CANSTAR website (e.g. offset accounts vs. redraw facilities; home loan fees you should know about; and fixed vs. variable).
One of the whoppers I heard while we were in the process of choosing a loan was, “You can’t connect an offset account to a fixed rate loan.”
Now, I know that our Research team could give me a list of institutions where you can link an offset account to a fixed rate loan. So I asked the mortgage manager outright, “Do you mean to say that you cannot connect an offset account to a fixed rate loan at your institution?”
They literally squirmed in their seat as they admitted that yes, that was what they meant. After that I was suspicious, so I grilled them on every aspect of the loan they had proposed. Folks, there’s no need to be rude, but don’t stop asking questions until you’re satisfied this loan is right for you.
Another suspect catchphrase I heard from each of the three lenders we visited was, “Interest only is a great idea.” Not for everyone, it’s not.
In my view, interest only is a good idea if you are an investor intending to rent the property out, because the interest is tax-deductible. But unless you sell, at some point you are going to have to repay that loan, so interest only is just delaying the inevitable.
One strange one I heard from people trying to convince us to do more than just open a home loan was, “A home loan is bad debt because you don’t get anything out of it.” But at the end of your loan, you will own your home outright. That’s not nothing.
If your budget doesn’t currently have room for you to start investing, you do not need to sign up for an “additional investment plan” beyond getting the home loan.
Why we switched institutions
We switched because we could save money with a lower rate from one of the Big 4. It was disappointing for us, because we believe customer-owned institutions act more ethically by reinvesting their profits into the products and services they offer.
On the other hand, our budget wants to pay less interest and the institution we’ve chosen is actually a champion at supporting the Australian community and protecting the environment. So it’s not all bad.
In addition, our experience of customer service with the Big 4 has (so far) been better than with a smaller customer-owned institution, simply because with the bigger base comes a bigger call centre that answers our phone calls quickly and efficiently.
Am I saying everyone should switch to one of the Big 4? No – not at all! In fact, some of the customer-owned institutions on our database offer lower interest rates, lower fees, and better customer satisfaction ratings than the bigger banks in our database. And the more people that find a customer-owned institution that works for them, the better the rates, fees, and customer service will get.
What we are saying is that you should always do your homework. Don’t stick with any particular institution just because your mortgage broker recommended one particular loan to you 10 years ago. Don’t stick with a bank just because it’s handy to have your credit card and your home loan come from the same institution. Choose the home loan provider who can provide outstanding value for your situation.
Finding the right home loan for you
It’s not easy to pick a new loan – trust me, I know! But CANSTAR makes the whole decision-making process ten times easier and smoother.
First, you can find out the minimum, maximum, and average interest rates you can expect to see for a fixed rate or variable rate home loan. For more information, check out our latest articles and star ratings reports for Refinancing, First Home Buyers, Next Home Buyers, Investing, Construction Home Loans, and even Reverse Mortgages.
Secondly, you can use our home loans calculators to work out whether a loan might be a good fit for you situation. Use the Home Loan Comparison Calculator to compare different home loans, and the Home Loan Split Calculator to see if splitting your loan between variable and fixed would help.
Use the Home Loan Borrowing Power Calculator to find out how much you could borrow, and the Home Loan Repayments Calculator to see if you can afford to pay a certain interest rate. You can even use the Home Loan Honeymoon Calculator to see whether an introductory rate is worth switching for.
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