Why does refinancing save me money?
In just over the last twelve months we’ve seen 5 rate cuts – from 1.5% down to 0.25%. Lenders can now access funds at a significantly lower rate, meaning they can pass on more competitive home loan offers. Refinancing your old interest rate could potentially save you hundreds of dollars a month and open up opportunities to:
- Pay off your mortgage sooner
- Reduce your amount of debt
- Enjoy more cashflow
- Make lump sum payments e.g. for renovations
Consolidate your debts and save
Personal loans, vehicle loans and credit cards often come with an interest rate far higher than your home loan. Refinancing your home loan gives you an opportunity to consolidate your other debts into one loan at a much lower rate. One repayment under one lender means less work for you. Keep in mind you’ll want to maintain your rate of repayment on your old debts to avoid compound interest – read more about that here.
What does accessing equity mean?
If you’ve been in the market a little while, your property may have increase in value – particularly if you’ve made significant improvements. Refinancing can not only offer you a lower rate, but the ability to access the value (i.e. equity) that is has accumulated. The equity you access could help you add further value to your home through renovations or be used for additional investments.
Is refinancing right for you?
There are a range of factors that determine whether refinancing is a good option for you. Speaking to your lender or a mortgage broker, who can present you with a range of competitive lender options, about your situation will help you determine if refinancing is the right move for you.
10 refinancing questions answered:
How does refinancing work?
There are two main reasons you may choose to refinance: to better your current home loan rate or to draw down (i.e. cash out) your equity. Keep in mind, if you’re cashing out equity, your lender may require proof of purpose for the funds (e.g. renovation, purchase of an investment property). Often your application will require similar documentation to a new home loan application (you can find a checklist here) as well as your current loan documents. Each lender will vary their exact requirements, this is something your broker can advise you on.
How can I calculate the equity in my property?
Current property value – Amount owing = Equity
Or, a $1,000,000 property – $500,000 outstanding loan amount = $300,000 equity. However, from a lender’s perspective there are many factors that effect this sum. Lender’s will often build in a padding for risk, most likely basing their calculation off an 80% loan-to-value ratio (LVR – read more about that here). So the calculation will end up looking more like this:
Property value at 80% LVR – Amount Owing = Lending Capability:
Property value: $1,000,000
Value at 80% LVR: $800,000
Amount owing: $500,000
Lending capability: $300,000
I’ve seen some cash back offers, are you able to offer them?
Yes, a number of lenders are currently offering cash back for refinances of loans and as brokers we are able to offer these to clients too. These offers typically have strict timeframes and requirements which we can help make sure you are eligible for.
How much will refinancing cost me?
Fees will vary from lender to lender, however in this competitive market many lenders offer no-fee or low-fee loans. There may be break costs associated with your current loan, particularly if you are in a fixed rate period. Your mortgage broker can help you determine whether the benefits of a refinance will outweigh any costs you incur.
Should I stay with my current lender, or go somewhere else?
This is where you see the true value of using a mortgage broker. Making multiple applications with a number of banks in an effort to understand their offers versus your current bank can negatively effect your credit score. A broker can provide you with a range of suitable and competitive loan products from across the market without you having to make an application or, in fact, lift a finger!
I’m currently paying Lenders Mortgage Insurance (LMI), what happens to this when I refinance?
If you currently have Lenders Mortgage Insurance you’ll need to establish a new agreement for your refinanced loan if you are still borrowing over 80% of the property value. Borrow below 80% of the property value and LMI does not need to be continued.
I have an investment property, does all of the above apply?
When it comes to refinancing your investment property, it’s important to get additional advice from you accountant or financial advisor. There are tax implications for borrowing additional funds or drawing down on your equity.
I’m using an offset account, what happens to this in a refinance?
If you wish to continue using an offset account, your broker can organise this with your new lender. Then it is as simple as transferring the funds to your new lender account after settlement, which you broker can also help you with.
Can I borrow more when I refinance?
Sure, but most lenders will only allow you to borrow up to 80% of the property value before incurring LMI.
Will my loan term restart after I have refinanced?
This is purely up to you. If you’re able to manage repayments, you can borrow at the remaining loan term and add no additional years to your expected loan completion date.