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Essential Guide to Refinancing Your Mortgage

September 29, 2023

With the mortgage cliff on the horizon, understanding how to refinance your mortgage is more important than ever before.

In 2023 and 2024, over a million borrowers will come to the end of their roughly 2% fixed-rate home loan terms, originally acquired at emergency rates during the pandemic. When this happens, they’ll be forced into higher variable-rate mortgages anywhere between 5.9% and 7%.

Many Aussies are naturally stressed at the prospect of spending thousands of dollars more per month to service their home loans. But fortunately, the situation is not all doom and gloom. There has so far been no sharp increase in defaults, with banks and economists remaining optimistic about the financial resilience of mortgage holders.

Despite this small glimmer of hope, the road ahead remains tough. Mortgage holders everywhere are sweating over their finances, trying to scrimp and save in any way they can. Luckily, with professional help from mortgage brokers like us, managing your costs by refinancing your mortgage could help you stay financially afloat without the stress.

The benefits of refinancing your mortgage

When the fixed-rate term of a loan comes to an end, lenders often won’t automatically offer their existing clients the best interest rates available. Instead, these more desirable rates are typically only offered to new customers.

The good news for you is that by refinancing your mortgage with a different lender, you have the opportunity to access lower introductory interest rates. This can potentially lead to substantial savings in your repayments over the long term.

The even better news is that as existing mortgage rates rise, new to bank lending rates will start to plunge, putting banks in stiff competition with each other. This puts borrowers moving from fixed rates to variable rates with a new lender in a position of relative power as they’re considered lower-risk borrowers than new buyers. Consequently, lenders will want to draw refinancers away from their competitors with incentivising rates.

Working with a broker like us can ease the burden of managing the transition at the end of your fixed-rate period. We’ll be there to help you stay afloat when the mortgage cliff hits, making the process smoother and less stressful.

Factors to consider before refinancing

Refinancing your mortgage is a major financial decision, not to be made lightly. Before moving ahead, it’s important that you carefully evaluate your current financial situation and future goals. Without doing so, you won’t know for certain whether refinancing is right for you.

Before refinancing your mortgage to get a cheaper interest rate during the cliff, consider these factors:

Costs to refinance: The fees associated with refinancing can sometimes add up quickly. You need to look at the change costs on your current loans and be confident that your long-term savings with your new loan will outweigh these fees. That’s where we come in handy, we can take all of the guesswork out for you. We will always review your full position, not just the interest rate.
Equity and property value: Refinancing with a loan-to-value ratio (essentially the current value of your property and how much equity you have in it) higher than 80% may make it difficult to qualify for a cheaper rate, and you might also have to pay for Lenders Mortgage Insurance (LMI). We will do an up-front valuation for you free of charge to ensure you are at or below 80% LVR avoiding Lender’s Mortgage Insurance.

Credit rating: A weak credit score may make it difficult to secure the attractive rate you’re after. Plus, refinancing your mortgage appears on your credit history, and lenders may also be wary of people who refinance too often.

Debt consolidation: If you have significant debts in addition to your mortgage (like a car loan), you could roll these repayments into your mortgage when refinancing, making your financial life simpler.

The refinancing process step by step

Your mortgage broker is there to act as an intermediary between you and the lenders, simplifying the refinancing journey and helping you secure the most suitable loan option based on your financial circumstances and goals.

The general process of refinancing is as follows:

Initial consultation and document gathering: You meet with a broker to discuss your goals and assess your eligibility. Then, you’ll provide financial documents to assess your borrowing capacity, and your broker will perform a credit check.

Loan product selection and submission: Your broker will recommend suitable loan products from various lenders and will assist you in completing the application.

Lender and property assessment: The lender will review your application and conduct their due diligence, which will typically involve a property valuation to determine the current market value of your home.

Approval, legal and settlement: Once conditionally or unconditionally approved by your lender, your broker will guide you through the legal process, including the signing of loan documents and settlement arrangements.

Funds disbursement: When settlement is complete, your new lender pays off your existing mortgage and the new loan is established, and then you can begin making repayments.

Mistakes to avoid when refinancing your mortgage

Despite the importance of refinancing a mortgage, many people forget these three key factors.

Don’t get confused by the loan term: Refinancing to a longer term may reduce your incremental repayments, but it can add up to a greater total cost than what you otherwise may have paid.

Don’t underestimate your loan features: Finding the best-value home loan isn’t only about getting the cheapest rates.

Don’t forget to plan long-term: If you refinance shortly before you sell, there won’t be enough time for you to accrue significant savings on the interest. You’ll want to make sure you’ll own the property long-term for it to be worth it

Take control of your finances today

We’re here to help you refinance your mortgage and tackle the mortgage cliff head-on. With our expertise on your side, you can be confident you’re getting the best deal on your new loan, and stress less about your finances.

Appointments with Connected Finance come to you at no cost, so you don’t have anything to lose by booking a time to chat with our team and learn more about your home loan options.