Attention‌‌ ‌refinancers‌

Attention‌‌ ‌refinancers‌

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If you’re faithful to your bank, they’ll be faithful to you, right?

Wrong.

Banks are faithful to their shareholders, not their customers.

Banks do not reward loyal customers with lower interest rates – just the opposite, in fact. Banks often charge lower rates to new customers (who they’re keen to attract) and higher rates to existing customers (as their own data shows they assume are too lazy to shop around – we call this “lazy tax”).

For proof, check out the graph below, from the Reserve Bank of Australia.

Notice how the line for existing customers (the solid brown line) is higher than the line for new customers (the dotted orange line)? That is because existing customers often get charged higher interest rates consistently.

If your partner was unfaithful to you and took you for granted, would you continue the relationship?

Or would you look for a new partner – one who would treat you properly? Bad analogy? Maybe but I think you get the point.

Banks spend truckloads of money on marketing to make you think they love you. But don’t be fooled. The only thing they love is their profits, it is how their executives get their bonuses.

That’s why it might be time for you to break up with your bank …

How refinancing works

You might be wondering – “How can I break up with my bank if I’ve got a mortgage? Doesn’t that mean we’re together forever?”

Not at all.

You can do a thing called ‘refinancing’ – that means switching your mortgage from one lender to another. Refinancing is common: many Australians do it.

Here’s how it works. Imagine you had $500,000 left on your mortgage, and you wanted to refinance from Bank A to Bank B:

  • You get a new loan approved with Bank B.
  • As part of this you give Bank B the okay to pay $500,000 to Bank A.
  • Now you owe $0 to Bank A and the loan is paid out.
  • And you’d owe $500,000 to Bank B and you start saving money and paying their loan.

(By the way, if you switch loans but stay with the same lender, that is known as ‘restructuring’ rather than refinancing.)

7 reasons why you should think about Refinancing.

Refinancing may not suit everyone. But for most people, refinancing can deliver significant benefits by letting you do some of these things:

  • Get a lower interest rate.
  • Get a different type of interest rate (from variable to fixed, or vice versa)
  • Get a loan with better features.
  • Get a larger loan amount.
  • Get a simpler loan structure.
  • Consolidate multiple debts into a single, smaller monthly payment.
  • Access the equity in your property.

So, should you refinance? And, if so, how?

It all depends on your individual situation and what you’re trying to achieve.

To find out if refinancing is right for you, call us on 029437541 or download our free refinance checklist.

Refinancing to get a lower interest rate.

Refinancing to a lower interest rate means you can save money on interest. That gives you two options:

  • Reduce your monthly repayments to the new, lower amount (so you save money each month).
  • Keep your monthly repayments at the original, higher level (so you get ahead on your mortgage and pay it off much faster).

To get a better idea of the financial benefits of refinancing to a lower interest rate, check out this example.

Refinancing to get a different type of interest rate.

When fixed rates are lower than variable rates it is a good time consider fixed rates. When you are about to go on maternity leave it is a good time consider fixed rates.

When you are looking for the security and predictability of a guaranteed interest rate or been told fixed rates are a good idea it’s time to look at your options.

Or maybe it’s the other way around, you think that interest rates are likely to trend downwards or if the fixed r? In that case, you can take advantage by refinancing from a fixed to a variable loan.

Refinancing to get a loan with better features.

Sometimes, it is cheaper to have a basic home loan package but then as life and interest rates change you may want to upgrade to what is known as a ‘professional package’ loan.

Basic home loan packages, which are popular with first home buyers, often have these characteristics:

  • Minimal fees
  • Variable interest rate
  • Low interest rate
  • Extra repayments option

Professional packages tend to have these characteristics:

  • Annual fee or monthly fees
  • Split loan options
  • 100% offset account
  • Free Credit card
  • Interest Rate discounts on Variable and Fixed rates

Sometimes it can be your situation that dictates the type of loan you have for example a basic home loan packages can be popular with first home buyers, who want a simple low-cost loan. Professional packages can be popular with more affluent borrowers and investors, who can take advantage of the offset account.

Sometimes, professional packages can include discounts on home and contents insurance (although make sure you shop your insurance around before taking any option).

Refinancing to get a larger loan amount.

If the value of your home has increased, you might be able to refinance into a larger loan.

For example, if your property was valued at $500,000 when you bought it and the bank allowed you to borrow 80%, your loan would’ve been $400,000. If the property is now worth $600,000, you might be able to increase your loan to $480,000 (as 80% of $600,000 is $480,000).

You could then spend or invest that extra money or you could park it in an offset account so it’s on hand at a later date. The thing to remember here is banks work under responsible lending guidelines and this mill mean they need to understand what you want the money for. Each Bank or Lender will have a different policy on what they accept.

Refinancing to get a simpler loan structure.

Sometimes, when you get a loan directly from the lender, the bank will give you a confusing loan structure or a structure that is best for the bank.

In that case, you might want to refinance to a new loan structure that makes it easier to pay off your loan or buy an investment property. Or when talking to The Home Loan Guy you begin to understand there is a better and structure that works for you.

Refinancing to consolidate multiple debts into a single, smaller monthly payment.

If you’re like many Australians, you might have multiple debts, including a home loan, car loan, personal loan, credit card and tax debt.

So, you might benefit from rolling all those debts into a new mortgage. This could help in three ways:

  1. Reducing your monthly interest bill (because your home loan interest rate will generally be lower than the rate being charged by the other debts)
  2. Reducing your monthly fees (because now you pay only one set of fees, instead of several)
  3. Saving you time (because now you make only one payment per month, instead of several)

That said, refinancing to consolidate debt might actually cost you more money. Imagine for example, you consolidate a car loan into your mortgage. That would allow you to switch from an interest rate of, say, 8% (for your car loan) to, say, 3% (for your mortgage). However, a 3% loan you pay off over 30 years will actually cost you more in interest than an 8% loan you pay off over 5 years:

  • 8% loan paid off over 5 years = $4,332 in interest
  • 3% loan paid off over 30 years = $10,355 in interest

To avoid this, you need to increase your repayments on the new loan, so you pay it off faster. You may be comfortable with the repayments on both loans and find repaying both easy. In this case it is a perfect reason to refinance. What you then do is apply the same repayment from both loans into the one new home loan.

This will then accelerate the payments on the car loan so you pay it off quicker.

Refinancing to access the equity in your property.

Another reason you might refinance is to borrow against the equity in your property.

Wait, what is ‘equity’ again? Well, equity is the difference between the current value of your property and the balance remaining on your home loan. For example, if your property is worth $800,000 and you owe $500,000 on your loan, you have equity of $300,000.

Another way of thinking about equity is that you ‘own’ $300,000-worth of your property while your lender ‘owns’ $500,000-worth.

Most lenders will let you borrow against your equity – for example to pay for renovations, the deposit on an investment property, a family holiday or a new car. However, you won’t be able to access 100% of your equity. Instead, you’ll probably be allowed a maximum of 80% (assuming the lender believes you can repay the new loan).

To continue the earlier example, you’d be able to access $140,000 of equity:

Some lenders will allow you to increase your loan from 80% to 90% – which, in this case, would increase your available equity from $140,000 to $220,000.

However, if you borrow above 80%, you generally have to pay lender’s mortgage insurance (LMI). In this particular example, your LMI premium would be about $18,000.

Some lenders would insist the LMI premium be subtracted from your loan, which would reduce the
amount you could borrow from $220,000 to $202,000. Other lenders would allow you to capitalise (i.e. add) the LMI into your loan, which would increase the loan you are repaying.

Please note that lenders often charge higher interest rates for mortgages with a loan-to-value ratio
above 80% plus charge the LMI fee.

Refinancing to pay for renovations.

There are two types of renovations you can do – non-structural and structural. The two different types of renovations require two different types of loans.

Non-structural renovations are changes that don’t alter the structure of the property, such as building a new kitchen or bathroom. For this type of job, lenders will generally provide a ‘cash out’ loan (where the lender gives you cash to spend). Some lenders will ask you to provide quotes to verify the expenses.

Structural renovations are changes that do alter the structure of the property, such as adding an extension or doing a knock-down and rebuild. For this type of job, lenders will generally expect you to get a construction loan. As part of the process, you’ll need to prove you have council approval and a contract with a builder.

How to refinance.

So, now you know why so many Australians refinance each year. But how do you do it?

For more information, check out this step-by-step refinancing explainer.

The Home Loan Guy has helped many people refinance, and can help you too. Call us on 0294385410 or complete you Financial Position form to start the process and we’ll talk you through your options.

How much does it cost to refinance?

Refinancing may incur some or all of these costs:

  • Break fee (existing loan)
  • Discharge fee (existing loan)
  • Application fee (new loan)
  • Mortgage registration and transfer fees (new loan)
  • Valuation fee (new loan)
  • Legal fee (new loan)
  • LMI (new loan)

You need to make sure the benefits of refinancing exceed the costs, as in its worth the effort and you are better off.

In many cases, refinancing is financially beneficial, because the money you save over the life of the loan (in the form of lower interest rates and/or fees) may be significantly greater than the relatively small upfront cost to refinance.

Refinancing can also deliver non-financial benefits – for example, your quality of life may significantly improve if you refinance to fund renovations. How much benefit would you get from building nicer bedrooms for your kids or replacing the doors to capture the winter sun?

Let’s have a detailed look at the potential costs of refinancing:

You may have to pay a break fee – potentially of thousands of dollars – if you exit a fixed-rate loan early (i.e. two years into a three-year term).

Lenders charge break fees to cover the cost of their lost revenue, so the size of the fee is determined by how much time is left on the fixed-rate loan and the interest rate being charged.

If you have a fixed rate loan now, call your existing lender and get a pay out quote to see if this is an issue.

Lenders incur admin costs when they close out an existing loan. These costs will get passed on to you in the form of a discharge fee. A typical discharge fee is about $350.

Lenders incur admin costs when they set up a new loan. These costs may get passed on to you in the form of an application / establishment fee. A typical application / establishment fee is $600, although a lot of lenders will waive this fee to attract your business.

State governments charge a fee to register a mortgage and to transfer the registration from one lender to another. Fees differ from state to state, but in NSW you generally pay a little under $200 to register a mortgage and another $200 to transfer it to a new lender.

Your lender might insist on getting a third-party property valuer to assess your property as part of the refinance process. Again, a lot of times they are keen to get new loans on their books o they will absorb that cost, but sometimes it can be passed on to you and it is around $350.

Many lenders use external lawyers to handle the paperwork associated with either discharging you from one loan or establishing a new loan. These fees might be passed on to you – potentially around $400.

LMI

You might have to pay lender’s mortgage insurance if you have less than 20% equity in your property (i.e. if the loan-to-value ratio for your new loan exceeds 80%).

When refinancing the likely cost to you will be around $750, you are likely to you pay only these fees:

  • Discharge fee = $350
  • Mortgage registration fee = $200
  • Mortgage transfer fee = $200

Of course, disclaimer…. the cost may be higher if other fees are charged by your old lender and/or new lender. This is why you need to chat to The Home Loan Guy so you can fully understand these fees.

When we discuss your refinancing options, we will not only compare the interest rates of your existing loan and possible new loan – we will also compare fees. Fees can significantly influence the total cost of a loan. Sometimes, a higher-rate loan with lower fees can cost less over the long-term than a lower-rate loan with higher fees.

Also, we will take individual lender policies into account, because one lender might give your property a higher valuation than another, for example, or one lender might be prepared to lend you more money than another.

The moral to the story is that while interest rates are important, they’re not the only thing to consider.

What are some traps to watch out for when refinancing?

Here are five things that can go wrong when refinancing:

Rates are important, but you also need to consider fees, features, customer service and other factors when deciding which lender and loan product to choose. Sometimes, a higher-rate loan with better features will be more
suitable.

Some lenders entice borrowers with artificially low interest rates – a loan might have a honeymoon rate (i.e. lower rate) for, say, the first year, before reverting to the real (higher) rate.

If the value of your property has decreased since you bought it, your equity might now be less than 20% – which would mean your new loan might have a loan-to-value ratio above 80% and you might be charged lender’s mortgage insurance. So it can sometimes pay to get a different valuation from another lender as this could be higher and save you considerable fees.

If you consolidate a higher-interest loan (such as a car loan) into your new mortgage, and you pay off that car loan over the new, longer loan term (e.g. 30 years rather than 5 years), you might be charged more in interest over the
long-term, despite the lower rate. So you need to pay it off faster.
5. Rushing the decision. Many people decide to refinance after seeing an ad for a lower rate or special offer. They then go with that particular loan – even though, if they shopped around, they might discover a better option. So to is accepting the offer form your existing lender, is it really the best avaliable?

Want to avoid these five refinancing traps? Speak to an experienced mortgage broker.

Call us on 0294375410 or complete this free assessment form to discuss your refinancing options.

When can I refinance?

In short, you can refinance whenever a lender is willing to give you a new loan … but you should refinance only when it’s in your interest.

For more information on when you can refinance, download this refinance checklist.

A final word on refinancing

Refinancing can be confusing and complicated, because there are so many options and so many things to get your head around.

That is why it makes sense to speak to an experienced mortgage broker – one who’s handled hundreds of refinances over the years.

At The Home Loan Guy, we have the expertise to assess your individual situation, explain your options and make recommendations.

It’s important to remember that your circumstances will change during the course of a 30-year mortgage. Also, the home loan market is constantly changing, with lenders regularly changing their rates and policies. So just because a particular loan or lender was suitable a few years ago, does not mean that’s the case today. As a result, it might make sense to refinance.

Call us on 0294375410 or complete this free assessment form to begin the refinancing process.