Refinance home loan is the most popular buzzword among borrowers, particularly for those who have held mortgages for a while. The reason for refinancing may vary from borrower to borrower. However, the majority aim is to trim down the interest rate.
During this time of a historic low cash rate set by the RBA, many lenders are coming up with enchanting home loan products. So, refinancing your mortgage may be favourable. However, it requires a precise comparison between your existing home loan and the one offered.
The following factors will help you decide to refinance your home loan:
When Should I Refinance My Home Loan
Without any objective, nothing can be done well. So is refinance. Here are the reasons to refinance your home loan is –
- A better interest rate – mostly looking for a lower rate compared to the existing one
- Switching the type of interest rate, from variable to fixed rate home loan.
- Accessing the home equity – over the period of time, the value of the property changes and builds equity. Using the existing equity to make improvements in your property and therefore increase its base value is a smart move. Also, to buy a new car or finance your holiday.
- Consolidating your existing loan – adding the personal loans or car loans into the mortgage to offset the extra repayments
- Adding additional home loan features – offset, redraws, split, etc, to take more value out of your mortgage.
Market Dynamics
One of the major tasks is to understand the current market dynamics. Whatever your reason for refinancing, proper knowledge of the market and the economy will pay you more. For instance, the economy is going through the boom phase. It means a rise in GDP, productivity, income, employment, etc. Generally, the interest rate is higher in a booming economy. However, when the boom ends, it typically signals the start of a recession. So during the recession, the opposite is true. The property market and the credit market are highly affected by this cycle. So, before you refinance your mortgage, dig into the available economy and property report. It will help to understand the current dynamic and forecast the future trend.
Types of refinancing
Refinance can be done in two ways. One is an internal home loan refinance, and the other is external. The internal refinance allows you to refinance and continue your home loan with the existing lender. While the external refinance involves moving to a new lender. The new lender will settle your remaining balance with your existing lender. It will rewrite the home loan at the new agreed terms and conditions.
Whether to do an internal or external refinance merely depends on various factors. It is directly linked to your purpose or objective of refinancing. Mostly, borrowers switch lenders if they can get a better deal on their home mortgage loans. Or the existing lender may not be able to solve the unique circumstances. Like, you want to consolidate more than four types of personal loans, while your existing lender allows up to three personal loans. In that case, an external refinance is helpful and may serve your purpose.
Interest rate Vs Comparison rate
The common reason to refinance is to find a new and lower interest rate. But a lower interest rate may not mean lower repayments. You may pay more after refinancing, including adding more fees. Thereby, look at the comparison rate. The comparison rate gives you a fair idea of how much your monthly repayment will be.
Fixed or Variable interest rate
Many often opt for refinancing their home loans to secure a fixed rate. A fixed rate is typically for a specific period of time. While Standard Variable Rates (SVR) float and change based on the cash rate.
For example, if your current home loan balance is $475,000 at a variable rate of 5.11%, you are paying a monthly repayment of $2,807.33 for a 25-year term of 25 years. You have also predicted that the interest rate will rise further in the near future. Therefore, fixing the interest rate may reduce the risk of interest rate volatility and save thousands of dollars over the life of the loan.
Pay attention to the economic changes before switching your home loan interest structure. Consider taking help from a professional mortgage broker or credit adviser to avoid any mishaps.
Associated Fees with Refinancing a Home Loan
One of the major points to consider before refinancing your home loan. There could be several fees associated with refinancing. Depending on the lender’s policy, different fees may be applicable. For instance, breaking a fixed-term loan has higher cost implications and charges. You may pay more fees than you save from lowering the interest rate. So work out the fees and find out the exact dollar figures. A smart way is to check your current home loan agreement and find out the relevant fees.
If you are refinancing your home loan refinance with a new lender, then check the figures first. Calculate the fees linked with the early settlement and discharge from the old agreement. It may be worthwhile to chat with your current lender first and negotiate the existing loan terms.
If you are looking to access your equity, then watch out for the LVR. All the lenders have a set LVR. An LVR of above 80% comes at an additional cost of LMI unless you are a doctor, medical professional, or in any other profession that is exempted by the lender from LMI.
There are other types of fees that come with refinances. Find more here: How Much Does Home Loan Refinance Cost?
Loan term
Paying less interest is achievable in two ways. One is the lower interest rate, and the other is the lower loan term. By lowering the interest rate, you may lower the monthly repayments. But it is likely to increase the total cost of your home or business loan options. With a lower loan term, you may pay more in monthly repayments. But you are also paying off your loan faster and paying less interest.
If you have a reasonable and steady cash flow, consider a lower loan term (e.g less than 30 years) to quickly get rid of the loan. However, the financial reality may not remain constant at all times. Refinancing at a lower interest rate is a good idea to solve the cash-flow issue in the short term. If your cash flow or income improves, add as much as possible to loan repayments. Consider having an extra repayment feature or prepayment in your home loan agreement to implement this strategy.
Capacity to Repay
Now let’s look at the facts and figures. One key factor that influences the lender is the capacity of the borrower to repay.
Say, for example, you entered into a home loan two years ago. You used to be a salaried employee with an annual income of $350K+. Assumed the remaining total balance of your mortgage is $2.5 million. In these two years, if you have changed your profession or business structure and become self-employed. Assume your business is growing steadily, but your annual income is down to less than $ 150 K. Keeping this scenario, if you want to refinance your existing loans with a new lender, you need to pass the lender’s serviceability. Despite good credit behaviour, a new lender may refuse to consider your refinance loan based on the lender’s serviceability failing criterion.
So it is crucial to do some maths before you apply for refinancing your home, car loans or business loans. Fortunately, the credit policy varies from lender to lender. Do some pre-work, and it will be worth considering some professional mortgage broker services or help. You can also try out online calculators to find your borrowing capacity. It is helpful to get a rough idea.
Research and try to compare
When looking for refinancing, nothing beats good research. Lenders usually come up with new offers when the cash rate changes. So it’s worth doing some pre-work. Many often prefer to go with one specific lender straight away. Even in this case, research may help to negotiate further.
If you are seeking a lower interest rate, compare the market offer first. Then, try to negotiate the same with your current lenders. If the lender agrees, then you can save a few dollars in fees and charges. Otherwise, try out with the next lender. If you want to access your home equity, try to look for lenders to allow higher LVR.
Taking Help from a Professional on How to Refinance a Home Loan
In many cases, refinancing the home loan is pretty simple. But it requires a good understanding of economic factors, market conditions and most importantly, your financials. Often, reasons for refinancing, such as accessing the home equity, debt consolidation, or even switching the type of interest rate, may require a thorough analysis and calculations. Any miscalculation may cost you more than your present loan. Remember, it is you who will be continuing with the home loan and the cost implications associated with it. So, taking help from an expert professional mortgage broker does count.
After everything else, it is wise to consider some other factors where a refinance may not make sense. Such factors are holding the property for not long enough, high penalties on refinancing, especially breaking a fixed term, any previous impaired credit history, lack of a sound source of income, etc.
Therefore, we suggest analysing your present circumstances, followed by reviewing your home loan agreement before applying for refinancing.
You can also take help from us. Contact Finmortg Brokers to get a free home loan health check and make an informed decision.
