Can I refinance my home loan? When is a good time? Can I consolidate my debts?
These are some common questions we are receiving from our clients.
With interest rates at record low and households looking to reduce their costs, many people have been speaking to us about reviewing their home loans.
In fact, there was a “Record high home loans refinanced in May” this year according to Money Management1 jumping from $12 billion in April 2020 to $15 billion in May 2020.
What is refinancing
Refinancing is finding a home loan or mortgage which suits your current financial situation. Often people take out a home loan and leave it as is throughout the life of the loan. Unfortunately, your finances and situation often changes and refinancing involves finding a home loan which suits your new situation.
By adapting your home loan to your current situation, its often possible to save money on interest rates or pay off the loan quicker.
Is mortgage refinancing right you?
Application for refinancing follows most of the requirements as with applying for a new home loan. The Lender will assess your current financial position to determine your eligibility.
This includes providing proof of employment income, market valuation of the property, and your expenses.
Some of the common hurdles typically seen in refinancing include:
- Loan to Value Ratio
Simply this is the percentage of the market value of the property over the debt. The most common hurdle where the Loan to Value Ratio (“LVR”) is over 80%.
For example, if the property market value is $500,000 with an associated loan balance of $400,000, the LRV is 80% ($400,000 / $500,000 = 80%).
Where the LVR is over 80%, the Lenders requires the Borrower to obtain Lender Mortgage Insurance (“LMI”). Often it is the case where the cost of LMI is above the overall saving from refinancing.
It is important for you to get in touch with us to ascertain if you have an appropriate LVR to refinance.
- Break Costs
In the event a Borrower is eligible to refinance, it is often found the full repayment of an existing loan incurs ‘break costs’ for the early repayment.
If the break costs are higher than the over saving from refinancing, this could be not an appropriate strategy for you.
We can review the terms of your current loan to ensure that you have considered this important detail.
- Loan Term
Refinance to obtain provide the Borrower with an immediate cash flow saving.
For example, as shown in the below illustration the Borrower obtains a rate reduction from 3.5% pa to 2.6% pa from refinancing.
The immediate result reduces the monthly loan repayments saving of $718 per month (from $2,320 per month to $1,601 per month).
However, the loan term is reset back to 30 years (from initial 20 years). This results in additional $19,728 interest paid with the lower interest rate ($176,489 at 2.6% versus $156,761 at 3.5%).
Refinancing may offer an immediate cash flow saving however the long-term implications may make the strategy inappropriate for your goals.
It is important to ensure your circumstances are considered before proceeding.
Other benefits of refinancing a home loan
These depends on your situation but some of the other benefits from refinancing we have seen include:
- Better loan features: access to features that were not available with your current loan such as an offset account, redraw facility or option to make additional repayments.
- Debt consolidation: where you can direct the equity in your home to pay out other loans or credit cards.
- Adding value to your house: accessing the equity in your house for value adding renovations such as a new bathroom for the future.
What are the costs of refinancing?
There are many other incidental costs associated with refinancing including:
- Break costs of your current loan
- Establishment costs of the new loan
- Application fees
- Settlement fees
- Valuations fees
- Other government taxes and charges.
Prior to refinancing it is important to understand the fees and charges.
Regularly reviewing your financial goals and objectives will help you regularly look at your mortgage. We will happily review your mortgage and financial situation to ensure you stay on top of you finances. Please don’t hesitate in contacting us on 08 6227 0353 or at firstname.lastname@example.org to do a review of if you have any queries.
The information posted is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making a decision.