So you have decided to look into refinancing your home loan? That’s great. As a mortgage broker, I speak to hundreds of clients every year about the possible advantages that refinancing either with their existing lender, or a completely new lender can bring.
Now it is true, that not everyone who has a home loan should necessarily refinance. It is largely dependant on what your current loan rates and terms are, as well as how long you have held the loan. In many cases, there is definitely both a long and short term benefit to refinancing, and if this is you, this article will explain the key steps to refinancing your home loan and either lowering your payments or lowering your total interest and fees and charges expense over the life of the loan.
1. Make sure you are refinancing your home loan for the right reason.
Refinancing an existing home loan is a great choice in the following circumstances.
Debt consolidation
If over the years you have found yourself acquiring other debts, whether large or small it might be advantageous to move these additional liabilities into a single facility. Whether credit card debt, other personal loans or store cards, a debt consolidation loan that uses the equity available in your home is almost always going to lower the overall interest rate for the various debt facilities and bring down monthly repayments. This relief can provide additional cash flow for your family month to month and often be a huge help during budgeting.
Releasing equity
If you have managed to gain significant equity in your home, whether due to time (having been servicing the mortgage for a number of years) or through property value increases (which have slowed down recently, but can still be significant), you may be eligible to draw on that equity to make another large purchase, for example a new car, home renovations or the acquisition of an investment property. Now, this can be a difficult process and greatly depends on how the lender seeks to ascertain the current value of your property. If you are considering this option, speak to a professional mortgage broker as we have the skills and resources to ensure you have the correct documentation and valuation information for your home to give yourself the best chance of success.
Taking advantage of lower interest rates.
It is true that we are currently experiencing some of the lowest interest rates of the past 20 to 30 years due to a number of different factors. If you have held your mortgage for an extended period of time, say 8 years or more, chances are you are going to be able to get a much lower interest rate than what you are on currently. This can have a huge impact long term and help to lower repayments, which means you can pay additional amounts on top and minimise your interest charges while the rates are still low. This being said, a loan with a lower interest rate isn’t always a better loan. There are a number of other charges and fees that you need to factor into the overall cost of your loan before you can accurately make that comparison.
Low doc loan holders
Many homeowners current mortgages are low-doc loans, which now in comparison to years past are much harder to get approval for. If you are on a low-doc home loan, and your financial and asset situation has improved, you may now be eligible and get approved under a full doc home loan, which is always going to have better terms, fees and rates. Anyone who went down the path of low-doc loans should definitely be speaking to a mortgage broker, as these loans are more often than not quite expensive when compared to full-doc or more current home loan products.
2. Pull out the calculator, and do your numbers.
Finding the true cost of a home loan isn’t that complicated. Once you have considered the annual fees and charges, as well as the interest rate, repayment amounts and amortisation schedule, it is fairly simple to see which loan offers a better long term gain for you and your family. That being said, if numbers aren’t your thing, you can always speak to an expert to ensure that you have a clear understanding of the comparison between your current loan, and a new loan you might be considering.
Things you should be factoring in, in addition to the standard fees, interest and charges are:
- Early exit costs
- Home loan application costs
- New facility establishment costs
- Loan approval fees
- Settlement and handling charges on the loan should you proceed
- Mortgage stamp duty
- Lender’s mortgage insurance
- New registration costs
- Ongoing account fees on the loan
You should only consider refinancing if you can reasonably recoup these costs in a short timespan of around 1 to 3 years.
3. Have your documentation ready to go.
It is vital that you have all the documentation ready to go before applying for any new loan. In 2019, it is much more difficult to get approval for any loan facility and home loan refinancing is the same. In addition, since your last application there may be some additional points of documentation that you require, so make sure you speak to an expert to understand everything you will need to give you the best chance of success.
Things you will need to have.
- Current financial position
- Latest tax returns
- Documentation about your current assets and liabilities
- Documentation about any other loans you hold
- Current credit report
- Recent (within the last 3 months) valuation of your home.
These are the pieces of documentation you will need at a minimum, and as always, the more documentation you have to build your case the better chance you will be of getting a quick approval.
4. When should you not refinance?
Refinancing isn’t always the right choice. Whilst a lower variable rate might seem attractive at face value, that is not necessarily an accurate reflection of the true cost of the loan.
By chasing minor percentage points of difference, you will find that the overhead costs of refinancing will probably outweigh the long term benefit. This is especially true in the case of variable rates as even a .25% increase by the RBA and in turn, your lender could instantly make your new loan a worse proposition than your previous loan.
In addition to this, if your loan is of a lower value, and you have paid a significant amount of your principal off, the interest rate will have less impact on your monthly repayments, than if your principal amount were higher.
There is also the relationship with your current bank or lender to consider. If you have your home loan, as well as other loans and your banking tied to the same lender, you will need to understand how refinancing with this lender or moving to another lender will impact the other services you hold. Always speak to a mortgage broker and your banking manager to ensure you understand the full impact of refinancing.
What do you need to ask your lender?
Before you decide to sign on the dotted line, you should have a chat with both your lender or have a mortgage broker do that on your behalf. The questions you could be asking include:
Can I make additional repayments, and is there a limit on this?
What are the exit fees and charges if I pay my home loan off ahead of the term?
Can I receive an interest rate reduction without having to refinance?
Is there a better off-set account setup that could help me, instead of refinancing?
Bernie Kyne
Mortgage Consultant
0400141757
bernie.kyne@mortgage-express.com.au
