Refinancing Your Home Loan

The Reserve Bank of Australia has increased interest rates by 3.10% over the last few months, which means that factoring in the rising cost of living, the average mortgage holder in Australia is paying an extra $1300 to live per month. With a massive jump in expenses and stagnating wages you might be looking for ways to save money while maintaining ownership of you home. You wouldn’t be alone. In August this year, 27,667 homeowners refinanced their mortgage compared to 23,642 for the same period 12 months ago.

As of October, the six rate increases since May this year have added $834 per month to a family’s budget, not factoring in inflation.

Given that’s the case, refinancing has never looked more attractive.

What is refinancing?

Refinancing is the act of cancelling your current credit agreement in favour of another one. Refinancing means you will sign a new contract. The contract generally has more favourable interest rates, payment schedules and/or other terms and conditions. The most common times that people refinance are when interest rates rise or fall.

Reasons to refinance

If you have been struggling to come up with the additional funds for your mortgage then you should look at refinancing. Refinancing can be helpful in a number of scenarios.

Lower interest rates

The biggest reason to refinance at the current point in time is to enjoy lower interest rates. You can still find a rate below 5% by using comparison within Nice Loans website. In addition, if you refinance your home loan you may also get a cashback reward. The average cashback reward is between $3000 and $5000 with some lenders.

If you are refinancing for a lower interest rate it’s beneficial to check that the fees are lower as well. The last thing you want to do is switch from high interest to high fees. That would defeat the purpose.

Switch to a fixed or variable rate

When interest rates are increasing as they currently are in Australia you may want to lock in a certain rate. Refinancing will give you the opportunity to switch to a fixed rate so you are not subject to market influences. A fixed rate can give you security over what your mortgage repayments are each month.

Lower fees

Home loan fees are a total pain and could cost you thousands of dollars over the lifetime of your mortgage. Before you refinance for lower fees, compare the different fees on offer and read your existing contract to see if it’s worthwhile or if it will cost you more in the long run.

Access your equity

With interest rates increasing and property prices falling as a result, you may be in a position where you want to tap into your equity so you can buy an investment property or pay for home renovations. Equity home loans can be structured in many different ways and we can talk to you about your situation. You can also access your equity by cashing out on some of what you have already paid on your home loan. Be aware that if you do access your equity for this purpose your monthly repayments will increase because your mortgage value will go up.

On the topic of equity, some mortgage holders refinance because their property’s value has increased which means that their equity has increased. An example would be that you paid $500,000 for your home with a loan of $450,000 but its value is now $600,000. That means your equity is now 25% rather than 10%. With higher equity, lenders are more likely to give you a better deal than someone with a low LVR (Loan to Value Ratio). That will lower your interest rate and fees, giving you the opportunity to pay off your mortgage faster.

Switch lenders

Most lenders offer new customers attractive sign on deals, so it’s a good time to consider looking at a new lender if you want to take advantage of those offers. If you want better conditions then it never hurts to talk to your current lender to see if they can match the other lender’s offer. You also need to decide on netbank features and understand if their banking app has all the features that are important to you.

Change the period of your home loan

Many people who refinance do so when their circumstances have changed. If your income has increased or decreased then you may want to refinance to shorten or extend the length of your loan. Some lenders offer repayment holidays if you are struggling to meet your existing repayments.

Am I eligible to refinance?

Before you refinance you need to meet the eligibility criteria, which typically includes:

• Having at least 20% equity in your home or paying LMI (Lenders Mortgage Insurance)
• Showing proof of your income, assets and other liabilities.
• Current home loan documentation.
• A good credit score. You can get a free credit report at Equifax.
• A reliable home loan repayment history.

What are the drawbacks of refinancing?

Although there are many advantages to refinancing your home loan, it isn’t entirely without consequences. If you do refinance then you may end up paying more interest over the lifetime of the loan. That could outweigh the interest savings.

If interest rates decrease and you have committed yourself to a fixed rate home loan you could find yourself paying high exit fees to take advantage of the lower rates.

Refinancing could reduce the equity you have in your home, which could mean that you now have to pay Lenders Mortgage Insurance or that your monthly repayments increase. Your monthly repayments are guaranteed to increase if you shorten the length of your home loan, which may mean that you can’t sustain any further interest rate rises and if you’re on a floating rate that has the potential to force you into a mortgagee sale. Before you look at refinancing it is worth chatting to a mortgage broker to see if refinancing is right for you.  We are independent mortgage brokers with access to home loans that you may not otherwise find. Our process is very simple and takes only 20 minutes to fill out the application. We also have a useful calculator so you can work out what’s right for you and what your anticipated monthly repayments would be.