Sometimes your home loan needs to change with your life. Whether you’ve changed jobs, had extraordinary expenses, or want to lock in a lower interest rate, refinancing your investment or owner-occupied mortgage has never been easier. It is well worth taking the time to see if refinancing can help you cash out your equity, bundle your debt, or reduce your repayments.
What does it mean to change, switch or refinance a home loan?
Changing, switching, or refinancing your home loan means replacing your existing mortgage with an entirely new one, usually with a different loan provider. People have all kinds of reasons for wanting to refinance their mortgage, but most often, borrowers want to take advantage of lower interest rates or increased loan funding in a competitive lending market. Changing a home loan can make a lot of sense for people who want to consolidate debt, lower their repayments, pay off their house faster, or capitalise on their home’s equity, which is the difference between what the borrower owes on their home and its current value. Some people choose to refinance because another mortgage offers features like an offset account, redraw facilities, or split facilities.
Before you decide to switch lenders, you should carefully weigh the pros and cons of doing so with your own financial advisor. While a shiny new low-interest rate can seem attractive, it may carry hidden fees or extend the total life of your loan. Your monthly repayments may be lower, but sometimes you’ll pay more money overall in interest over the life of the loan. And while many variable interest home loans carry low or no discharge fees, getting out of a fixed-rate mortgage can sometimes come with a hefty price tag from your former lender. You may also need to pay lenders mortgage insurance when you refinance your home loan. It’s important to be vigilant and do the math before you decide to switch. Online tools like a home loan calculator and ASIC’s Moneysmart mortgage switching calculator can help you compare costs and make an informed decision.
Reasons for changing home loans
There are numerous reasons why you might want to change your home loan, and not all are related to the quest for a lower interest rate. Different things matter to different borrowers, and you may prioritise customer service or the location of a lender.
Consumers are becoming more aware of the social and environmental impact of the companies they do business with – and that could extend to your lender. If you’re conscious about the type of lender you get a home loan with, you can often find out more about a lender’s community involvement and corporate purpose through their website. For example, some lenders have policies to address climate change or have set targets for sustainability. Is your lender a B Corporation or a member of the Financial Inclusion Action Plan? These are all things to consider when looking for a new lender.
How to change home loans
The first step in changing your home loan is to ask your current lender for a better deal, and if they don’t offer one, shop around to see if another lender can beat it. If you are a self-employed borrower and don’t have the standard income and tax documentation you should consider the low doc loans that are available. And when you’re getting interest rate quotes from financial comparison websites be sure that you also factor in any associated fees from both your new lender and your old one. It’s possible that they could cancel out the benefits of a lower interest rate.
A mortgage broker or a trusted financial adviser can also help you crunch the numbers and help you better understand your options. To save time, it’s best to compile all your supporting documents so you can share these with your broker at your first meeting. Gather all relevant income documentation that can help demonstrate your ability to repay any new loan. If you work as an employee, this could be your last few payslips as well as your most recent group certificate. If you’re self-employed, then it’s ideal if you can provide your two most recent tax returns and business financial statements.
In addition to evidence of income, you will need a copy of your existing mortgage statement, as well as photo identification. It may help to write down a budget for your monthly expenses for your statement of assets and liabilities. If you have credit cards, car loans, or personal loans, you may wish to bundle your debt into your new mortgage for one easy monthly payment. In that case, you’ll want to have copies of applicable bills ready.
Your mortgage broker will let you know of any other information the lender will require and will submit the loan application for you. Once your loan is approved in principle, the lender will arrange for a home valuation.
Once your loan is formally approved the lender typically handles the process of exiting your old loan and depositing any additional funds into your bank account. Once your new mortgage has been settled, you will receive online or paper statements from your new lender and start making repayments to them instead.
How long does it take to change home loans?
If you work with an experienced broker or adviser, you can often change your home loan in about half an hour, through a simple phone call and/or and scanning and sending the required documents online. (For example, some eligible borrowers can get indicative pre-approval for an interest rate in just two minutes, and our turnaround time on lending approval takes only a day or two in many cases.) While with other banks, the timeline for refinancing a mortgage may take longer, and the income documentation requirements are stricter. Self-employed people and independent contractors are especially better off going with a custom lending company that can cater to their specific needs. Otherwise, the refinancing process can take quite a bit longer and be more labour-intensive for the borrower.
Can I change a home loan to an investment loan?
Many people want to know if they can change their personal home loan to an investment loan if they move out of a house and start charging rent to tenants. Before you consider this, it’s a good idea to consult an investment advisor, and/or tax professional to make sure you are aware of any potential tax benefits or liabilities.
Can I change an investment loan to an owner-occupied loan?
When you take out your initial mortgage, you will need to specify whether the loan is for an owner-occupied home or an investment property. Investment property interest rates tend to be a bit higher than owner-occupied interest rates, so many people wonder if they can move into their former investment property and refinance it as owner-occupied. The answer is yes if the borrower can prove they have been living in the property for a certain period of time, and if the investment loan is held in their own name. But it is important to speak with your financial adviser or accountant to ensure you maintain any capital gains tax treatment.
Some people take out a loan on a residential investment property in a trust vehicle like a self-managed super fund and want to know if they can refinance that mortgage to an owner-occupied mortgage. The answer is no – SMSF loans are made for investment income only. Trustees, fund members, and their relatives may not live in the home, rent it, or buy it from the trust. Thus, refinancing to owner-occupied interest rates is not an option for an SMSF loan.
Does changing jobs affect a home loan?
Provided your income hasn’t significantly changed, many lenders will still consider your application even if you’ve only been at your new job for a short period of time. Lenders are more likely to approve a refinancing application if your new job is in the same industry you had worked in previously, but exceptions can be made in some cases.
And while it is especially difficult to refinance a home loan while you are unemployed, some lenders may still approve your application if you have sufficient liquid assets or alternative income sources. The main concern a lender will have is to ensure you can afford the repayments and that taking on the loan won’t put you in a position of hardship. Contact a Liberty Adviser to discuss how to change your home loan.