Thinking of Refinancing Your Home Loan?

Please use the information contained here that is relevant to your situation and let it help you achieve the outcome you desire.

As you may be aware, the home loan industry is continually evolving. This is also the case with your home loan. While your home loan may have been perfect for you a few years ago, it’s highly likely that it would be out of sync in today’s mortgage climate.  So, if your mortgage no longer suits your lifestyle, you should think about seeking one that does.

Home loan interest rates are at historical lows. Now is the time to look at the features and attributes other lenders can offer that may be better suited to your lifestyle.

As your lifestyle changes, it is the perfect launch pad to take a few short moments to evaluate your mortgage. Let me make special note that refinancing in a small number of cases does not always make sense for every borrower.

How does refinancing work?

Refinancing allows borrowers to rewrite their current mortgage with another lender, with the general objective to secure a lower interest rate, access equity in the home, or to take advantage various loan features and mortgage structures offered by other lenders.

As the Borrower, you have a choice to refinance with your existing lender or choose an alternative lender.  If you have decided to choose an alternative lender, your new lender will pay out your existing home loan, and you will commence making repayments to your new lender.

The first important point.

Before considering a refinance, it is important to evaluate your current financial situation and the goals you wish to achieve over the next few years.  With the help of an expert broker you can determine the best product to match your lifestyle and goals.  Refinancing may be advantageous to you by reducing your repayments via lower interest rates. Savings of $3,000 -$10,000 a year for an average size loan are possible.  It is important to seek the advice of an experienced mortgage broker to ensure that you choose the right product for your situation.

When you refinance, it helps to consider the things that are important to you within a home loan. Ask yourself,

  • Is the interest rate competitive?
  • Is the fee structure competitive?
  • Is the lender offering a cash back incentive?
  • Is the home loan relatively flexible?
  • What is the backend support and service I will receive?
  • Have I considered rate rises in the future?
  • Do I plan on selling or changing lenders again in the next two years?
  • How long will it take to get my loan approved and settled?

Once you understand what is important to you, you are ready to take the next step. 
Contact your Finance Consultant/Mortgage Broker and go over your scenario and desired outcomes.

Brokers normally have over 30 lenders to choose from which means hundreds of products to choose from. If you were to use a bank loans manager, they would offer you 3-4 options at most and you would only get the advertised interest rate.

An experienced broker will have software that will find the cheapest possible rate available if that’s what you are after. This means more dollars back in your pocket.

Why move to an alternative lender?

A lower rate is not the only reason a person is prompted to refinance their mortgage. Often dissatisfaction with a particular lender, the need to consolidate debts, or access to flexible options are among the top reasons to prompt a refinance.   A major factor which often influences or discourages a borrower to refinance is the uncertainty associated with their employment. What needs to be kept in mind is that changes to a borrower’s employment scenario can affect their borrowing capacity, making it harder for their refinancing loan to be approved. In general, it is better to act ahead of an employment move.

Home renovation is often top of mind for many homeowners. Replacing the kitchen and bathroom, or perhaps the need to add another bedroom are often popular triggers to refinance. Also popular are the desires to purchase an investment property, to upsize one’s home, or exit a fixed rate mortgage to take advantage of record-low interest rates.

If you are an investor the savings from refinancing could cover your properties insurance and management fees. Wouldn’t that be nice?

The need to consolidate debt.

These days, it is quite easy to get tempted into various forms of consumer debt. Whether it be via credit card, or retailers promoting a ‘buy now pay later’ program, sometimes – with the benefit of hindsight – these choices are not in the borrower’s best interest and lead to excessive repayment levels.   If you are considering debt consolidation, there is certainly a correct way and a wrong way to go about it.  The best option is to seek the direction of your trusted Mortgage Broker who will discuss the option to reduce the interest rate payable on your consumer debt through refinancing your home loan.

A Mortgage Broker will be able to show you the calculated savings of reducing your bad debt and rolling it into your home loan, so you will know where you will stand if you choose to proceed.

One great way to make a refinance TWICE as effective is to put any extra savings -could be $300 a month- back into your loan. This has the same effect as compound interest only in reverse. After a few years you will be amazed at how much extra you have paid off your home loan.

When it may not be considered sensible to refinance.

In some circumstances, there is no value in refinancing. Generally, if you have only had your home loan for a short period, or your home loan balance is under $100,000, refinancing may not make financial sense. If your total loan balance across all properties is over $200,000 then refinancing still makes sense.

While interest rates are historically low, it is important to remember that rates are likely to rise at some stage. Lenders already “stress” your home loan at 2.5% above any interest rate you are offered so they already take this into consideration.

How to make a decision to refinance.

The decision to refinance your home loan should ultimately come down to its value and the cost-effective nature of doing so. While I tell my clients that they should review their mortgage every 2 to 3 years, it is possible your current lender has passed on all possible savings to you and it is not necessary to refinance.

There are costs associated with refinancing which should be considered. Fees may include break costs, discharge fees and establishment fees. It is essential that the broker has taken these costs into account when calculating savings.

It is also important to consider whether your LVR (Loan to Value Ratio) has increased to a point where lenders mortgage insurance may be required. If your LVR is above 80% then LMI will be required from most lenders.

An effective way to review your mortgage holistically is to think about what your circumstances were when you first took out your mortgage. Think about what has changed in your life, how your personal financial circumstances have perhaps changed. If you are looking at your budget and want to find savings across all areas of your life, then your mortgage is one of the areas where you can find the most savings.

Depending on the size of your mortgage securing a 0.25% to 1.5% interest rate reduction could save you thousands and perhaps tens of thousands per year.

With more money in your back pocket it can reduce the financial stress that many Australian’s are feeling now.

The costs of refinancing a Variable rate loan can be as little as $300 though if you loan is Fixed then there could be higher costs associated.

You should consider staying away from refinancing options if the costs outweigh the benefits in the short to medium term. This outcome is especially common when exiting from fixed-rate loans as there are often very high exit fees.

Ensuring that your financial health remains sound.

  • If you choose to refinance with another lender, it is important you continue to review your mortgage every 2 to 3 years to make sure it is working at peak performance for you.
  • When refinancing, if possible, place any extra savings back into your loan to get TWICE the benefits. Extra repayments will bring your mortgage down at lightning speed. An Offset account is great for this.
  • If you have an investment property, it is important to consider monitoring the capital growth of the property and the remaining balance of your mortgage after refinancing.

If the capital growth in your investment property begins to increase in value, you may consider accessing that equity to purchase another investment property.

So now you should be fully armed with enough knowledge to decide if a refinance is an option you should be considering.

Have a great day.

Written by:
Jason Hare
Mortgage Broker & Finance Consultant

Please be aware the information provided in this guide is general in nature, and does not form part of any advice given to you. Please consider your circumstances before you make any decisions.