The three steps to successfully refinance (and save $428 a month)

The rate rise has hit hard. On a pretty typical $700,000 mortgage, you’re needing to find almost $110 extra a month now.

So the rush is on to ditch and switch lenders for cheaper ones. Roughly 35,000 home-owning Aussies are now refinancing their mortgages each month, says ABS Lending Indicators data.

Though that number was slightly down in the last quarter, from a record the previous quarter, the value of loans shifted was the highest ever in the three months to December: more than $68 billion.

This is because, far from having to wear rate hikes, there are competitive, quality mortgages out there – while the average variable rate is now about 6.5 per cent, there are loans with real offset accounts (so loans backed by authorised deposit-taking institutions) way down at circa 5.5 per cent.

But not many people realise you must make essential preparations before you apply to refinance. You can’t just submit and hope. Here are the three steps to a successful mortgage refinance.

Step 1: Go to spending ground

What is known as the Netflix test means that a prospective lender will interrogate your every expense in the three months before application. So if you’re a little loose with your lifestyle, they will see, and it will also shrink your disposable income for a mortgage repayment.

Before you apply, then, stop the spend – just for three months.

It’s called the Netflix test because streaming services, possibly a multiplicity of them, are a common way lots of us today spend optional money. Next, look at Uber and the like – deliveries and also takeaways. Of course, your restaurant and bar spending should go too.

Just don’t buy anything you can do without. The whole point is to swell the surplus between your expenses and your salary so that you can comfortably afford the new repayments.

Don’t forget, either, that though the loan for which you are applying will be cheaper (the whole point), you still need to be able to pass a three per cent repayment stress test. As in, you need to be able to cope with 300 basis points of rate rises from here. And that’s where you need to carefully engineer ‘fat’ in your finances.

Step 2: Check – and correct – your credit score

While you’re spending prudently, give your credit report a thorough read. A lender will look at this as well as your all-important credit score as part of its loan consideration.

Your every financial move feeds into your score, the snapshot of how responsible you are with money. You must make sure this is above average or better before you apply for a loan

The easiest way to repair a credit score is if you find errors on your credit report, which you can correct with the institution and then get updated with credit bureau records. But also bear in mind that any rejection you have had for credit, and even too many applications, will suppress your score.

Refinancing that $700,000 from a 6.5 per cent to 5.5 per cent rate would give you instant repayment relief of $428 a month.

So think about the timing of any moves prior to the big one: your mortgage application. Every Aussie is now entitled to four free credit reports and scores a year, and more if they have found an error or have been rejected for credit.

The two main credit bureau from which you can get your report and score are Experian and Equifax.

Step 3: ‘Limit’ your credit cards

Before you hit ‘go’ on a home loan application, look at your credit card limits.

It often comes as a shock that even unused limits are factored into the calculation of the money you have at your fingertips for a repayment. Bear in mind it’s that repayment plus 300 basis points that you need to be able to cope with.

Whatever your card limit, the assessment typically rules out seven times that amount from what you can borrow – so, $10,000 in limits will cut you out of $70,000 of borrowings.

And this is even if you responsibly zero out the debt at the end of every month and therefore carryover no credit card balance and pay no interest.

This is under a three-year-to-clear rule that assumes you could run up your debt to the maximum limit as soon as a loan is extended, and calculates how much from your finances this would absorb if you were to repay it in three years.

It’s a pretty brutal calculation that seriously impedes your potential loan amount.

A lender – or brokers – should be willing to crunch the numbers factoring in your credit card limits on your maximum loan amount before you apply. And then you can decide whether to cut, or even cut up, cards.

It’s worth it: refinancing that $700,000 from a 6.5 per cent to 5.5 per cent rate would give you instant repayment relief of $428 a month.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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