In all my time working within home lending, if I had to identify one area of major interest to my clients, that would be around the upsides and pitfalls of home loan refinance.
There’s a big misconception of clients thinking home loan refinancing could be “time consuming”, “a lot of work”, “not worth it”, “I’m happy with my current lender”, “we have been long term clients and they look after me” etc.
But what if that wasn’t true? What if doing a home loan refinance has become very simple, and not time consuming, and that you could be getting access to better rates than your long-term bank/lender which will save you a lot of money, both now and in the long run?
This is where my industry experience and what I do here at Fox Home Loans comes to the fore. This is where I step in and do all the heavy lifting for you.
Take the time to properly consider exactly why you want to refinance your home loan.
Ask yourself:
Having a clear understanding of what you hope to achieve by refinancing can help you make a better decision.
The numerous costs of refinancing a home loan can sometimes set you back thousands, leaving you wondering whether it was worth it.
To avoid any ugly surprises, look at the terms and conditions of both your existing home loan and the loan you’re looking to refinance with, to discover what the ‘change’ costs will be e.g. discharge fees, valuation fees, break costs etc.
If you’re refinancing to get a lower interest rate, you should first calculate how much less you’ll pay in interest at that rate. You can do this using our home loan repayments calculator. Then you can compare this saving to the total cost of refinancing. That should give you an idea of whether the refinance is worth it.
You may find that through the interest savings, you’ll make back the refinancing costs within months.
Whether you’re refinancing to secure a lower interest rate or to access more funding, you need to consider the current value of your property and how much equity you have in it. Your loan-to-value ratio (LVR) reflects your equity (e.g. if it’s 70%, your equity is 30% of the property’s value). If your property value has risen, your LVR would be lower, and you’ll have more equity in the property.
Keep in mind, the lender may value your property less than what you think it is worth.
When refinancing to get a cheaper interest rate, a lower LVR will generally stand you in good stead. But if you try to refinance with an LVR that is higher than 80%, you may struggle to qualify for a cheaper rate. If you’re refinancing to another lender, you may also face having to pay for Lenders Mortgage Insurance – even if you already paid for it when you first took out the loan.
When refinancing to access some of your equity (e.g. to pay for a renovation or to invest it in another property), you’ll generally be able to borrow up to 80% of the property’s value minus the outstanding debt. For example, if your property was worth $1 million and you had $600,000 owing on the mortgage ($400,000 in equity, 60% LVR), you may have up to $200,000 in equity available to borrow. Borrowing any more than that will push your LVR over 80%, which many lenders avoid.
Have you checked your credit rating recently? If it’s not so great, you might find it working against your efforts to refinance. Luckily, we do have Lenders on our panel that might still be able to assist.
Also, since doing a home loan refinance represents an application for credit, it appears on your credit report and can influence your credit score. Lenders can be wary of those who refinance too often, so having numerous refinance mortgage hits on your credit report can affect your interest rate bargaining power or indeed your actual eligibility to be able to refinance.
As part of our initial pre-assessment process here, we don’t affect your credit score. If you’re interested to know what your credit file looks like, we can provide you with a free copy of your credit file and spend some time talking you through what it all means.
Read some of the latest news on what interest rates are doing in the home loan market and what a variety of experts are predicting. If interest rates are expected to rise over the next few years, you might want to consider refinancing to a fixed rate product.
Try not to get to invested in what the journalists are saying, sometimes this isn’t always true. If you want an unbiased opinion on which lender is offering the best deals on the market for home loan refinance right now, ask me. This is what I do all day every day, and I work for you as my client, not the banks.
Do you know if you’re current home loan was set up with an introductory interest rate or honeymoon rate? If so, do you know what rate the loan will revert to at the end of the introductory period (often one to three years)?
You could also consider this for interest-only and fixed rate home loans – what will the rate revert to after the interest-only or fixed-rate period has passed? Revert rates are almost always higher.
In some instances, borrowers face the risk of being stuck with a high revert rate and unable to refinance to another lender at a lower rate – effectively becoming a prisoner to their mortgage. This could be because a lender’s lending criteria has tightened, your credit score has worsened, or your property value has fallen for some reason – raising your loan-to-value ratio (LVR).
If you are unsure about what your current deal is, I am happy to help you find out and cut through the banks jargon.
Think about what loan term you’re refinancing to – is it going to be longer, shorter or the same as the remaining term on your current loan? Be wary that while refinancing to a longer term can reduce your regular repayment amount, the total cost of the loan will be more (because interest is accruing over a longer period).
Refinancing to a shorter term has the opposite effect of increasing your regular repayment amount but saving you on the total interest payable.
A loan with a cheaper rate doesn’t necessarily represent the ‘best value’. When considering a home loan refinance to find a better deal, it’s important consider useful home loan features such as a redraw facility or an offset account that could help you save interest and help you pay your home loan off sooner.
As your Lending Specialist, I take the time to understand my client’s situation and future plans. Maybe you’re not wanting to keep this home forever. If that’s the case, we need to ensure that your loan is structured in the best possible way to minimise possible future fees and charges when you do sell.
If you have significant debts outside your mortgage, (such as a car loan, personal loan or credit card debts) you could consider consolidating these into the mortgage when refinancing.
This can make it easier to manage your debts because you’re repaying them all through the one regular repayment (weekly, fortnightly or monthly). The consolidated debts will revert to the interest rate of the mortgage, which may be significantly lower than the interest rates you were paying when they were standalone debts (credit cards can have interest rates of over 20% p.a.). However, because of the longer term of the loan, the total interest payable for the consolidated debts may be higher.
In some cases, consolidating some other debts has allowed them to free up some debt servicing capacity, which allowed them to start building their property investment portfolio.
Are you going to continue owning the property long-term?
If you sold the property shortly after refinancing to a lower interest rate, you may not have had enough time to accrue the significant interest savings required to make the refinance worth it.
Curious to see how much you could save in the long run? Don’t hesitate to reach out to me so we can go over your home loan review and quickly work out your options. It can all start with a quick 10 minute phone conversation that can potentially save you thousands.
Click here to set up a time for me to call you for a quick chat.
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Bill has over 26 years of experience working in the finance industry. He has worked across a number of different businesses including Home Loans, Personal Loans, Collections and Insurances. Bill's passion is to utilise his knowledge and experience in the industry to assist clients in meeting their financial goals.
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