The Art of Refinancing: 10 Things You Must Know

Finance Jan 29, 2024

6 min read

The Art of Refinancing
The Art of Refinancing

Refinancing is a financial manoeuvre that can potentially save you thousands of dollars, reduce your monthly mortgage payments, and help you achieve your long- and short-term financial goals. However, like any art form, mastering the art of refinancing requires careful consideration, strategic planning, and a deep understanding of the process. In this comprehensive guide, we’ll explore the nuances of refinancing and uncover the ten essential things you must know to make informed decisions and maximize the benefits.

1. Understanding the Refinancing Basics:

Before delving into the intricacies of refinancing, it’s crucial to have a solid understanding of the basics. What exactly is refinancing? In simple terms, refinancing involves replacing an existing loan with a new one, typically with more favourable terms. The primary goal of refinancing is usually to save money. This could be via more competitive interest rates, better loan terms or cash back offers.

However, someone might choose to refinance so they can borrow a higher amount (utilising their equity), to get cash out to buy an investment property, consolidate debt or change their rate to a fixed (or variable) option. These are some of the many reasons someone might look to refinance their loan.

2. Assessing Your Financial Health:

The decision to refinance should align with your overall financial goals. Assess your current financial health, including your credit score, income, and debt-to-income ratio. A strong financial foundation increases your chances of securing a better deal when refinancing.

If you don’t have a strong credit score, have missed some bill or loan repayments then it’s probably a good idea to get on top of those things before submitting a loan application.

Your mortgage broker can help you to think about your financial health. Sometimes you may feel like there could be improvements when in reality, you’re in ship shape.

3. Interest Rates and Market Trends:

Keep an eye on interest rates and market trends, however be aware that sometimes you are going to need to make changes to your circumstances and it’s not always going to align with what the market is doing. Refinancing can be advantageous when interest rates are lower than what you currently have. Monitoring economic indicators and consulting with financial experts can help you make well-timed decisions.

If you are looking at fixing your rate, then speaking with a broker can help you understand the trend fixed and variable rates are following. This can then inform what the next best decision is going to be for you. Other times, rates might not be so important, particularly if your reasons for refinancing are not to save money but to access equity or consolidate other debt.

4. Costs Associated with Refinancing:

Refinancing isn’t free. Understanding the costs involved, such as application fees, valuation fees, and payout costs is crucial. Your broker can help you calculate the break-even point to determine how long it will take to recoup these costs through the savings generated by the new loan or whether a refinance is going to be viable in the first place.

If you have a fixed rate loan and are thinking about refinancing this, you need to speak with your mortgage broker and lender first. The lender can provide a “break cost” which will be charged to you if you end your fixed rate term early. This formula is actually quite complex and the fees can be incredibly high (sometimes in the tens of thousands od dollars), which can often mean the benefits of refinancing simply aren’t there.

There are times when refinancing is not going to make sense, for example when the costs associated are too great. Read our article “Five reasons not to refinance” for more.

5. Types of Refinancing:

There are various types of refinancing, each tailored to specific financial situations. Whether it’s rate-and-term refinancing, cash-out refinancing, or consolidation refinancing, understanding the differences and choosing the right option for your needs is important.

Your broker will help you to understand which lender is going to best suit your needs, this can be due to a range of different reasons such as your credit score, LVR, and reasons for refinancing.

6. Credit Score Impact:

The refinancing process involves a credit check, and your credit score plays an important role in securing favourable terms. Learn how the refinancing process may affect your credit score and take steps to mitigate any potential negative impacts.

How does your credit score impact your ability to borrow? Check out our article and video here for more information.

7. Loan-to-Value Ratio:

The loan-to-value (LVR) ratio is the relationship between the loan amount and the value of your property. If your LVR is higher than 80% then refinancing is probably going to cost you more than it would save you, as the lender would charge you lenders mortgage insurance (LMI) again.

Before you commence the refinance process, first check what your LVR (roughly) is. If yours is over 80% then contacting your lender for a better rate is your next best option. If your LVR has dropped and is below 80% or 60% then a refinance can be a fantastic way of securing a much better rate. Why? Because the lenders all set different rates for different LVR’s. Your existing lender is not likely to automatically offer you a better rate when you drop into a lower LVR bracket so make sure you keep an eye on this as you pay off your loan as it could save you thousands!

8. Shop Around for the Best Refinancing Deals:

The first thing your broker will do is contact your existing lender for a better deal, we call this getting “pricing” – it’s the fastest and most impactful way to save money on your rate. Once your broker knows what discount your current lender is prepared to offer, they will compare this with other rates and options on the market to determine whether another lender is more competitive or not.

From there, you’ll be able to choose whether to stay with your current lender or refinance elsewhere for a better rate.

9. Document Preparation and Accuracy:

If you decide to go down the path of refinancing there are a couple of options that you will have available. Some lenders do a “Fast Refi” which means you only supply a few pieces of documentation to complete your application.

Other times a refinance is going to consist of the full application process, which means gathering your identification, pay slips, bank statements and other financials if you are self-employed or operating through a trust or company.

10. Consult with a Mortgage Broker:

Seeking advice from financial professionals, such as mortgage brokers or financial advisors, can provide valuable insights and guidance. Our expertise can help you navigate the complex world of refinancing and make informed decisions aligned with your financial goals.

Rather than trying to master the art of refinancing alone, work with someone like Entourage who can help guide you through the process. Our mortgage brokers do this day in and day out, from comparing loans to speaking with lenders, negotiating on your behalf and providing advice to ensure the product best meets your needs.

Apply to refinance here.