Refinancing your mortgage can offer various benefits, including lower interest rates, a revised loan term, or access to your home’s equity. However, the process requires thorough preparation to boost your profile and improve your chances of approval. So, what do you need to refinance your home loan?
Below is Freedom Loans’ guide to streamlining your refinancing journey.
The Four Cs of Loan Approval
An essential part of preparing for refinancing is knowing the four Cs of loan approval, as lenders use these criteria to evaluate your creditworthiness. By understanding them, you can prepare your financial profile accordingly, increasing your chances of approval.
Below are the four Cs and what they mean:
- Capacity: Capacity refers to your ability to settle the new loan. When you apply for refinancing, lenders will assess your income, employment history, and current debts just as they would with a new loan application. They will also calculate your debt-to-income (DTI) ratio to see if you can manage the new loan payments in addition to any existing obligations.
- Capital: Capital refers to your assets and savings. Lenders will assess your financial reserves and investments to determine your financial stability. Having substantial capital shows lenders that you have a financial cushion and are less likely to default on the loan.
- Collateral: Collateral is the asset you pledge to secure the loan – in the case of refinancing, it is typically the property you are refinancing. The lender will need an appraisal to determine your property’s current market value. This helps them assess the loan-to-value (LTV) ratio, which is crucial for determining the risk involved in lending funds to you. Your property’s value impacts the amount you can borrow and the terms of the loan. It also serves as security for the loan, guaranteeing your loan repayment – if you fail to pay off the loan, the lender can take the collateral to recover the loan amount.
- Credit: Credit represents your credit history and credit score. Lenders will review your credit report to check your borrowing and repayment history. A strong credit score indicates reliable borrowing habits and can improve your chances of approval and obtaining favourable loan terms, such as increased loan limits, reduced interest rates, and more adaptable repayment terms.
Organising Your Finances
Now that you know the criteria used by lenders, here are some tips to help you organise your finances in preparation for your refinancing application:
1. Check and Track Your Credit Score
Secure a copy of your credit report. Make sure it is accurate, correct any errors, and focus on improving your score by paying off outstanding debts and making timely payments. This is especially important in case you’re navigating the mortgage refinance process with bad credit.
2. Evaluate Your Current Mortgage Details
Assess your home’s current market value and calculate your equity, which is the difference between your home’s value and the amount you still owe. The higher your equity, the higher your chances of securing better loan terms. Review your current mortgage details, including the remaining balance, interest rate, and any features like offset accounts or redraw facilities.
3. Reduce Your Debts
Minimise your debt-to-income ratio by paying off existing debts. Lenders prefer borrowers with lower debt levels, as this demonstrates financial responsibility. Prioritise paying off high-interest debts and consider reducing unnecessary credit limits.
4. Create and Stick to a Budget
Lenders scrutinise your spending habits. Establish a budget to monitor and control your expenses. Reduce discretionary spending and save regularly to demonstrate financial stability. This can also help you handle potential interest rate increases.
5. Prepare the Necessary Documents
Gather all the required documents for the refinancing application. These typically include:
- Personal Identification Documents: You’ll need to provide proof of identity. Acceptable documents include your driver’s licence, passport, birth certificate, and Medicare card. Make sure that your personal information, such as your present address, birth date, and contact details, is up-to-date. You may also be asked about your relationship status and number of dependents, as these factors can impact your financial assessment.
- Proof of Income and Employment: Lenders need to confirm your ability to make regular mortgage payments. The required documents include your recent payslips (usually the last two or three), your most recent group certificate, your latest tax assessment notice, and a letter from your employer that confirms your salary. If you’re self-employed, the requirements differ slightly. You will typically need to provide Australian Taxation Office assessments and two years of business and personal tax returns.
- Proof of Assets: Providing details of your assets helps demonstrate your overall financial health. Include documentation for your savings and cash accounts, investment accounts (shares, bonds), property ownership, and valuable personal property (vehicles, high-end jewellery, art).
- Details of Existing Loans and Debts: Lenders will assess your current financial obligations. Prepare your statements for existing home loans (last six months), recent credit card statements, and statements for other debts, such as personal loans or car loans.
- Current Mortgage Details: Lenders require current mortgage details to help them evaluate the benefits and feasibility of the refinance. You’ll typically need to provide information such as your outstanding loan balance, current interest rate and loan features (offset account, redraw facilities), repayment amount and frequency, and any fees associated with switching or discharging the loan.
- Property Information: Lenders will likely require details about the property being refinanced. This can include your recent property valuation, council rates notice, and building insurance policy.
Addressing Common Concerns
Now that we’ve discussed what you need to refinance your home loan, let us answer some common concerns you might have when getting ready for refinancing:
Does refinancing hurt your credit?
Refinancing your home loan may cause a slight, temporary reduction in your credit score because of the credit inquiry. Fortunately, the long-term benefits of better mortgage terms can outweigh this temporary dip if you manage your loan well. To mitigate the risk of hurting your credit score, avoid applying for other credit around the same time as your refinance application. Also, make consistent, timely payments on the new loan to improve your score over time.
Do you lose money when you refinance?
While it involves costs such as application fees, appraisal fees, and potential penalties for early repayment, the benefits of refinancing may outweigh them, as it can save you money in the long run through lower interest rates and better loan terms. Carefully evaluate the total costs versus the long-term savings to ensure that refinancing is a sound decision for your financial situation.
How long does it take to refinance a home loan?
The approval process for refinancing can take 30 to 60 days, depending on your lender and the complexity of your application. Promptly providing all required documents can expedite this process.
Final Thoughts
Is it easy to refinance a home loan? It can be challenging, as refinancing your home loan requires careful preparation and organisation. But by understanding the requirements and improving your financial profile, you can present a strong application, enhance your chances of approval, and take advantage of the benefits that refinancing can offer.
Take control of your mortgage now. Connect with our specialists at Freedom Loans for tailored refinancing advice and make the most of your home loan.
1300 364 751