While in today’s uncertain financial times, it’s can be difficult for many people to borrow money for a renovation or investment property or to consolidate debt, those who’ve worked hard to pay down a mortgage have one strategic advantage.
Many people don’t realise that by paying off a property that is either holding or increasing in value over time, you also build what’s called home equity. And it is this equity you can leverage to potentially access the money you need. Here’s how
1. What is home equity?
Simply put, home equity is the difference between what the market will pay for your home and what you still owe on your mortgage. For example, if your home is valued at $400,000 and you still have $250,000 left to pay off your home loan, your home equity is up to $150,000.
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2. What is a home equity loan?
The term home equity loan is a general name given to a number of loan products where you can borrow against this home equity. This means you essentially use this equity as collateral for a loan. It’s a way to show potential lenders you have the ability to pay off any loan product you might take out with them.
Home equity loans can include such products as line-of-credit loans, 100% offset home loans, variable-rate mortgages with a redraw facility or even the refinancing of your existing home loan.
3. How does a home equity loan work?
How the loan will work varies widely, depending on the type of loan you are taking out and the specific rules of the lender, but they still operate under the same processes as other loans, remembering that the term home equity loan is a general one.
Rules and processes for home equity loans vary across banks and institutions. Some also have specific limits on the amounts they will approve for home equity loans, though this is not the case with all lenders. Most lenders will let you cash out the equity up to a total of 80% LVR without incurring Lenders Mortgage insurance.
You can refinance and cash out above 80% – up to 90% inclusive of LMI but you would need a strong application and a good reason to do this as its usually not cost effective.
You may also want to use your property as security if there is equity to refinance and purchase an additional property if there is equity.
Generally, home equity loans should come with lower associated costs than with other forms of credit, because you are borrowing against equity you have built. But always check this with your potential lender.
While home equity loans can be used for just about any purpose, most banks and financial institutions will ask you what you are using the released value for and may reject your application if they feel the purpose is not justified.
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4. What are the requirements for a home equity loan?
First and foremost, you will need to have built some equity into your home by going through a period of paying off the principal of your mortgage.
If you only recently started making repayments, or are perhaps in an interest-only period on your loan, you may not have built enough equity yet to apply for a home equity loan.
In general, most banks will try to ascertain if you’re using the money in what they see as a responsible way and as with any loan they make will carefully assess your ability to pay off the debt.
The higher the proportion of your total debt you’re borrowing, the more evidence most lenders will require that you’re using the funds in a responsible way, as well as of your capability to pay it off. You should be prepared to provide evidence of your income and expenditures.
If you’re self-employed, providing the required documentation can be difficult. In these cases, it may be harder to get a loan, but some lenders can have lower evidence thresholds, so it pays to shop around.
5. What is an example of a home equity loan?
One example of a home equity loan is the 100% offset home loan. This is a home loan where borrowers can reduce their interest payments through what is known as an offset account linked to their mortgage.
Borrowers can use the offset account as if it were a savings account, making deposits and withdrawing as they need.
The key is that the amount kept in the account is deducted from the total you owe when interest is calculated on the loan.
For example, if you have a loan of $500,000 and have $10,000 in your offset account, interest on your loan is calculated on $490,000, not the full $500,000.
So, the more you keep in the account, the lower your interest payments. This type of loan may not suit everyone, as you need to maintain a certain level of money in the offset account, depending on prevailing interest rates, to gain any reasonable benefits. And you have to also ensure you have sufficient funds to cover your mortgage payments.
Some lenders also may not offer offset accounts for fixed-rate home loans and many big banks don’t offer offset accounts on their basic home loans under $250,000. But some smaller institutions do, so it’s always worth asking if you feel it would suit you. As always, investigate your individual situation carefully before making the choice.
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6. What can a home equity loan be used for?
Most lenders will state that a home equity loan can be used for any “worthwhile” purpose. These purposes can include renovating your home, paying for a holiday or medical expenses, purchasing another residential or investment property, consolidating your debts into a single loan, buying a business or even buying stocks and shares.
Always keep in mind that the lender will assess the risk of each application individually. Of course, lenders will not provide loans for illegal purposes, but some may allow a loan when refinancing to pay a debt to the tax office, for example.
7. Are there any disadvantages to a home equity loan?
Borrowing more money of course means you have increased your debt and therefore the repayments you owe. It’s essential you discuss with your potential lender what all your new costs are and how you will pay it all back.
In some cases, lenders may require you to pay Lenders Mortgage Insurance (LMI), especially if you’re bringing your total borrowings up to 90 percent of your home’s value.
There may also be other costs and charges involved with opening a new loan and with any loans you may be closing early as a result.
These loans are also unavailable to people who have not yet built enough equity in their home, for example because they only recently took on their mortgage.
Equity is only built after a period of time paying back the principal of a mortgage. People who, for example, take an interest-only period on their loan, will not be building equity during that time.
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8. Is a home equity loan suitable for me?
Just as with any other loan, the most important factor to consider is your ability to pay it back.
If you are responsible with your finances and seek to borrow an amount you know you can afford, a home equity loan can be a quick, cost-effective option if you need some extra capital.
They can be an especially good option if you’re consolidating other debts into your home loan, as the interest rates on mortgages can tend to be lower than other types of credit. But it all comes down to your personal circumstances.
9. How do you prove the purpose of your home equity loan?
The sort of evidence you need to provide regarding the purpose of your loan depends on how much you are looking to borrow, what percentage of your total debt this represents, the purpose of the loan and which lender you’re applying to.
Processes vary across lenders, so make sure you ask them what conditions they put on their documentation requirements.
Here are some examples of what you might have to provide for various scenarios.
- Debt consolidation: A recent statement for each of the debts that are being repaid.
- Home renovations: A copy of the building contract or quotes from the contractors.
- Buying a property: A letter from your conveyancer, confirming you’re looking for a property or a copy of the contract of sale if a property has been found.
- Buying shares: An accountant’s letter, copy of a plan or statement of advice from a financial planner
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Words by Erin Delahunty
- Home Equity Loans
- Home Equity Loans
- What is a home equity loan?
- What Is A Low Doc Loan?
- What Is Cash Out?
- 100% Offset Account
Take advantage of lenders cutting their home loan rates! Speak to one of our home loan experts to compare hundreds of products across 25 lenders, and find the option that’s right for you!
What is loan serviceability?
Loan serviceability describes your ability to meet your home loan repayments based on factors such as the borrower’s income and the size of the loan. Simply put, the lender is assessing your ability to pay back the requested loan.
When applying for a home loan, lenders will take a number of factors into consideration to determine what size loan you can service, or meet repayments on, and each lender has their own formula to calculate this.
By assessing the amount of the loan, the income of the borrower, as well as the borrower’s expenses and other commitments, the lender generates a figure known as the debt service ratio that describes the borrower’s monthly debt expenses as a proportion of their monthly income.
Loan serviceability can be improved if your debt service ratio doesn’t fit the needs for your loan.
What is a loan serviceability assessment?
A serviceability assessment is one of the first steps of the loan application process, occurring before the lender performs a credit check. This is the name given to the process of considering the relevant factors that affect the borrower’s financial situation to determine their loan serviceability and debt service ratio.
A serviceability calculation is derived by taking a borrower’s income, less expenses, household expenditure, and the new loan repayment.
A further point about the assessment of serviceability is that lenders may add a buffer to the assessment rate in order to ensure the applicant will be able to keep up with repayments should interest rates rise.
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How much does a loan serviceability assessment cost?
A loan serviceability assessment won’t cost you anything as it is simply part of the checks and processes your lender will undertake when considering you loan application, similar to conducting a credit check.
How do lenders calculate serviceability?
Put simply your loan serviceability is calculated by subtracting your financial obligations from your income to determine the repayment amount you can comfortably meet. However different lenders will take different factors into consideration when calculating serviceability, meaning how much you can borrow can be highly dependent on your choice of lender. While income is the primary factor, lenders can also take into account overtime, commission payments, company cars, investment properties, welfare payments, dependents, and much more.
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Income is the primary factor that will influence serviceability, but this can come from a variety of places that include:
- Salary or income from employment, including secondary employment
- Rental income
- Welfare benefits, such as Centrelink benefits and in particular Family Tax Benefits Part A and B
Serviceability assessments are more nuanced than a simple calculation of income minus expenditure and each of the above factors can affect a borrower’s application to a different degree based on their individual circumstances.
Next your lender will consider any liabilities or financial obligations that you are already committed to paying, generally in the form of debt from other loans. The lender will also add a buffer into their calculations to allow for rising interest rates and to ensure you can meet your repayments. This means that as a general rule lenders set a maximum debt service ratio of between 30 and 35% of the borrowers income.
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Calculating your personal borrowing power
Your lender will also take your personal circumstances into consideration when calculating your borrowing power. For example, emergency service sector workers, like police, firemen, nurses and other healthcare workers, are considered more likely to rely on overtime pay and so the lender will often take this additional salary into more account than they would where overtime work is more sporadic.
This is where using a brokerage service can help you determine the lenders offering the highest serviceability calculation for your situation, or those offering the terms most important to your loan.
How do lenders assess my serviceability without knowing my preferred loan term or interest rate?
Until recently lenders assessed home loan applications with a default minimum interest rate of 7%, with common industry practice applying a rate of 7.25% to applications, a number significantly higher than current interest rates.
The Australian Prudential Regulation Authority (APRA) has recently given lending institutions the power to determine their own minimum interest rate for serviceability assessments. Lenders are not required to advertise their chosen assessment rates which typically range anywhere from 5 8%, which can make it easy for applicants to fail the serviceability test.
However, the changes to the default 7% serviceability rate means mortgagees seeking a loan based on current low interest rates may see an increase in borrowing power of 15% for first home buyers and as much as 30% for investors.
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How can you improve your borrowing power?
Serviceability can be improved to increase your borrowing power and achieve your property goals by either increasing your income or decreasing your expenditure or liabilities.
There are ways you can improve your serviceability to increase your borrowing power if your assessment returns results lower than you were hoping for.
- Reduce credit liability. Many people assume that as long as they meet their monthly repayments on credit cards they don’t pose any threat to their borrowing power, but lenders will assume available credit lines are a potential risk. Assess any credit cards, and particularly any that aren’t being used, and get rid of them, while also actively working to reduce any credit debt you have accrued.
- Consolidate existing debt. If you do have multiple credit cards with outstanding balances look into consolidating these into your mortgage loan to avoid costly monthly repayments from high interest loans which will negatively impact your serviceability.
- Provide accurate information in your loan application. Depending on the structure of your income, such as if you typically receive bonuses throughout the year, providing the standard two recent payslips may not be an accurate representation of your income. Keeping up with your tax returns will mean the lender can also seek a comprehensive payment summary from the ATO that can enhance your serviceability.
- Share the load of liabilities. Although a loan might be taken out in your name if you plan on sharing the financial burden with a partner or family member, proving this to the lender might strengthen your borrowing power.
- Consider a longer loan term. Most lenders will allow a maximum loan term of 30 years on a mortgage, although this might be flexible for the right candidate. Extending the lifetime of the loan will reduce the amount of each individual repayment and make repayments more manageable for borrowers. However, it’s important to remember that increasing the loan term will also mean increasing the overall interest and fees that you’ll pay on the loan overall. It’s worth considering what is more important to you in the case of lengthening the loan term.
- Save more equity. Although taking the time to save a higher amount of equity is not an option for every borrower, having a larger deposit when applying for a loan will increase your serviceability by decreasing your loan obligations.
Words by Danielle Austin
Get in touch if you are looking to apply for the scheme or if you’re unsure about your eligibility. Our home loan professionals can help you understand your options if you think a renovation could be in your future.
One of the biggest reasons homeowners refinance is to save money. If you switch to a lower rate, you can lower the amount of interest you’ll pay on your loan. You can also lower your monthly repayments when you add time to your mortgage – although with a longer term you may end up paying more overall.
The reality is, refinancing could save you a lot of money. However, whether you save in the short term or the long term, or both, depends on the details of your new loan and how much it costs you to refinance.
What Happens When You Refinance?
When you refinance, you end your current loan contract and begin a new one, switching from one loan product to a different one. The new loan takes care of the debt from your existing mortgage. You can change to a new lender or you can refinance with your current lender and switch to a new loan product.
How Can You Save By Refinancing?
When rates drop below the interest rate you’re paying on your current mortgage, or if you may qualify for a lower interest rate now because your borrowing profile improved enough, you may be able to refinance to a lower rate.
When you switch to a loan with a lower interest rate:
- Your monthly repayments will decrease
- You could save thousands (to tens of thousands over time) by lowering the amount of interest you’ll pay on your loan
- You may be able to pay down your loan faster, which could help you save even more.
Take for example the following savings comparison: For a loan amount of $450,000, switching from an interest rate of 4.2% p.a. down to 3.72% p.a. could save you $125 every month. Over the course of a 30-year loan, you could save a total of $45,000! How’s that for helping you sleep at night?
In the short term, you could also save by refinancing to a mortgage period that is longer than the amount of time you have left on your loan. For example, if you took out a 25-year mortgage 5 years ago and you refinance today to a new 25-year loan, you’ll end up making mortgage repayments for a total of 30 years. You would have been paying down your loan over the past 5 years so you’ll have a smaller balance than you did when you took out your original mortgage, which is now stretched out over 25 years with the new loan.
Be careful when refinancing to avoid adding extra years to your loan if your goal is to reduce the overall cost of your loan and to pay it off as quickly as possible.
If you are struggling with your household budget, however, getting your monthly repayments reduced with more time to pay off your mortgage can help you manage your finances better. Even though you may pay more in the long run, you may prevent financial stress that could lead to late payments or increased credit card debt.
Other Reasons to Consider Refinancing
You may have other reasons why you may want to refinance, which can help you save money in other ways:
- Debt consolidation: If you have a lot of debt from credit cards and personal loans, you can consolidate these debts into your home loan when your refinance. You’ll have to borrow enough to cover the debts you want to consolidate as well as the remaining balance on your mortgage. Compare the amount you’re paying now on all your accounts to how much you’d pay each month on your refinanced mortgage. This will show you how much you could save per month.
- Renovations: Planning a renovation? Instead of taking out a personal loan to cover the costs, you can refinance your mortgage to include enough money to pay for your renovations. You can also use the money for other things like a much-needed holiday.
How Much Does It Cost to Refinance?
When refinancing, you also have to factor in the costs involved to make the switch, such as your loan application fee and the cost of a professional valuation. Don’t forget, if your new loan has a high Loan-to-Value Ratio (LVR), generally anything above 80%, you’ll have to pay Lender’s Mortgage Insurance (LMI) when you refinance. Also, check if your mortgage contract has any break fees or exit costs.
Paying LMI or having to deal with costs like break fees can make it less worthwhile to refinance. You’ll want to do a thorough check of your estimated savings versus the costs involved to find out if you could save by refinancing.
Calculating Your Savings
To estimate how much you may be able to save by refinancing your home loan, factor in the interest rate difference, the length of your new mortgage, loan account fees, and any associated costs of refinancing. You can use our free tool to help you see what you could save each month with lower repayments and how much you could save overall.
Once you have an idea of how much you could save by refinancing, you can take the next steps, comparing lenders, researching loan products, and looking at what exactly you want to get out of your new loan. If you need any help estimating your savings or comparing home loan products, our team of refinancing experts are happy to help.
Are you looking for a more competitive home loan rate? If so, then contact refinancing.com. Our brokers have access to 100’s of products and have helped thousands of Australian’s secure the right home loan at more affordable rates.
If you are behind on your mortgage payments, refinancing may be a smart option to help you regain control of your home loan and your budget. The problem is, with a mortgage in arrears, refinancing isn’t as straightforward as it is when you have a clean credit history. Late or missed payments are a red flag to lenders that you may not be a responsible borrower. Your credit has probably dropped and you may have other factors that will drag down your status as a borrower, like shrinking assets and increased credit card debt.
The fact is, life doesn’t always happen like we expect it to. Unexpected car or medical bills, divorce, redundancy, or even simply getting in over your head financially are facts of life for many people. All of these things can be make it a challenge to make your mortgage repayments on time.
If you run into financial trouble for one reason or another and can’t make your repayments, your account will go into arrears. This isn’t just financially troublesome, it’s stressful too. If you don’t find a way to catch up and you default on your mortgage, you could lose your home.
There are things you can do to help you get back in the saddle, so that you can be paying your mortgage on time and managing your other finances comfortably. Cutting out unnecessary expenses to free up more of your budget or taking on another job to increase your income, at least temporarily, can help a little. But, for a lot of borrowers, choosing to refinance a home loan in arrears may be the most practical way to go.
Find out if refinancing your mortgage while you are in arrears may be right for you.
Behind on Mortgage Payments? – You’re Not Alone
At the beginning of 2018, the research firm, Digital Finance Analytics estimated that nearly 30% of Australian households were under mortgage stress, with approximately 54,000 households at risk of 30-day debt defaults.
What’s startling is that this mortgage stress problem has ballooned recently. With rising living costs in Australia combined with relatively stagnant wage growth, the number of households facing mortgage stress increased by 20% in the last half of 2017.
CEO of specialist lending firm Lucky Money, Louis Velasquez explains what he’s seeing, People are unable to meet mortgage repayments from current incomes and are managing increasing debt by putting more on credit cards.
With more financial stress, more borrowers may go into arrears and even default, which isn’t good for the borrower or for lenders.
Refinancing with a mortgage in arrears is a way to give you a fresh start on your home loan and the opportunity to get your debt under control.
How Refinancing a Home Loan in Arrears Works
When you switch to a new loan with a longer term and a lower interest rate, you could reduce your monthly repayments significantly. This means you’ll owe less each month. It will be easier to manage your mortgage and to have enough money to get ahead with other expenses so you can start saving again.
When you have a mortgage in arrears, however, it’s unlikely you’ll be able to qualify for a new loan with low rates when you refinance. Whilst the RBA hasn’t increased the cash rate for over two years, lenders have been slowly increasing their rates. So, only blue-chip borrowers are likely to qualify for the low-rate loan products that are still on the market today.
Also, your late mortgage repayments will make you a riskier borrower, which means you may have to pay a higher rate in order to qualify for a new mortgage at all. Still, even with a higher rate than what you may be currently paying, your monthly repayments could still decrease when you extend the term of your loan.
If You Have Good Credit and Minimal Late Payments
You may be able to refinance with your current lender. Most major banks, however, are not likely to offer a new loan to you if you’ve built up a track record of late payments and have fallen far behind.
If you are struggling or just missed one payment, yet have a clean credit history other than this, it is possible to stay with your bank when you refinance. Your current lender may also have other options to help you stay on your current loan and to bring it up-to-date. Depending on your situation and your history, they may be forgiving and even willing to create a workable solution. After all – if they can keep your business and you can pay your mortgage repayments on time with a new loan or another solution, everyone wins.
One thing you shouldn’t do is jump right into an application to refinance. You don’t want to have your bank make an enquiry into your credit file if you aren’t likely to qualify with them anyway. This may bring down your credit score even more, making it harder to refinance with another lender.
If Your Credit and Mortgage Repayments Are a Bigger Problem
Many non-bank lenders have home loan products that are designed for borrowers with bad credit. You may end up paying a higher interest rate, as well as additional expenses such as lender’s mortgage insurance or the lender’s risk fees, but if you can extend the term of your loan, you could still possibly get your mortgage repayments down. This would make your debt more manageable.
When you extend the duration of your loan, you will pay more over the life of your mortgage. Make sure you look at the costs of refinancing to a longer term with a home loan in arrears. The goal is to understand how much you are increasing your overall costs just to get those monthly repayments smaller.
A mortgage broker or specialist can help you compare specialist lenders. You may also want to talk to a financial advisor to help you develop a plan to reduce your debt and start saving more.
If you go into arrears, you do have options. Don’t assume there’s nothing you can do to improve your finances. Definitely, don’t let your mortgage repayments fall behind even more. The earlier you can identify the problem – and the less damage mortgage stress can do – the easier it will be for you to still qualify for a competitive loan when you refinance. Explore what’s available to you by talking to your current lender or a mortgage specialist and start moving forward.
Are you looking for a more competitive home loan rate? If so, then contact refinancing.com. Our brokers have access to 100’s of products and have helped thousands of Australian’s secure the right home loan at more affordable rates.
While you probably didn’t think about having to deal with a mortgage discharge when you took out your home loan, you’ll need to go through this process at some point. Find out what a mortgage discharge is, when you need one, and how to navigate the process. Knowing the ins and outs of discharging your home loan could save you money, as well as the hassle and stress of walking into the process uninformed.
Mortgage Discharge Basics
When you take out a home loan to buy a property, you don’t yet own the title for the property. Your lender does. Until your loan is paid off in full or the loan itself changes hands, they hold the Certificate of Title.
But, what about when you need to sell the home, you’re switching loans, or, you’ve paid it off? Your lender, of course, doesn’t need to hold onto the Title.
You need to make sure you get a mortgage discharge to release your lender from the mortgage obligation – and from possession of the Title. If you fail to register the discharge of mortgage and collect your Certificate of Title once you pay off your loan, tracking down your lender to get all the paperwork done correctly retroactively can become expensive.
For example, consider the case where the homeowners didn’t realise they needed to take this step until over a decade had passed. They had paid off their mortgage but they didn’t collect the Title or register the mortgage discharge. The lender had changed ownership over the years and they had to go through numerous legal hoops to find and retrieve the Title, at a significantly greater cost than if they had not delayed.
When You Need a Mortgage Discharge
When ownership of the mortgage is changing hands, you’ll need to go through the discharging process. So, this means you’ll need to discharge when:
You refinance your mortgage. When you refinance, you are changing lenders or, if you are staying with the same lender, you are at least changing loans. This means you’ll still need a formal discharge to get out of one loan facility and switch to another.
You sell your home. Whether you are moving for a new job or into a bigger house, chances are, you’ll move before you pay off your mortgage. Most Australians move house within 14 years of moving in. In this case, your mortgage will be listed on the Title as an encumbrance. You then have two options. You can apply for a substitution of security if you want to keep your home loan for your new property. Or, you’ll have to discharge the mortgage before the sale can be settled.
You’ve paid off your mortgage. When the loan is paid off, you have to register for a discharge of mortgage and register the Certificate of Title. Your lender may or may not do this step for you.
You paid off one part of a split home loan. When you have a split home loan – with one portion paid down at a fixed rate and the other at a variable rate – when you pay off one part of the loan, you’ll need a formal discharge for the paid-off segment.
How to Discharge a Mortgage?
Wondering how to discharge your home loan? You’ll want to take care of this process right away to help speed up the process, especially if you are trying to refinance quickly or want to sell your home quickly.
First, you need to talk to your lender. Let them know you need to discharge your mortgage and why. They’ll ask you to complete a discharge authority form to start the process. You may want to ask about any discharge fees at this point.
Second, you’ll need to access the discharge authority forms. You can call your bank and ask them to send you the forms or download them from your lender’s website.
Once you have the forms, you can complete them and return them to your lender. It will take your lender a good ten business days to process your request, so turn your form in as soon as you can. You don’t want something as simple as your mortgage discharge to slow down your refinancing or your home’s sale.
If you are discharging your mortgage because the loan is paid off, you need to take another step. In some cases, your lender will do this for you so be sure to ask. If they aren’t doing it on your behalf, you’ll need to do it – register the Discharge of Mortgage and Certificate of Title with the Land Titles office for your state. Each state has its own fees, which you’ll have to pay if you are registering on your own behalf.
One Reason Not to Discharge Just Yet
In most cases, it’s better to take care of your mortgage discharge right away so you don’t run into problems in the future. However, there is one reason to hold your mortgage open. If you have a loan with a redraw facility and you want to access funds to cover other costs, such as a renovation or investment, you may be better off keeping your mortgage open. This way, you can just use the loan you already have rather than having to take out a new loan. You can discuss this option with your lender or a financial advisor to make sure it’s a smart move for you.
Otherwise, go ahead and take care of your discharge so it is one less thing you have to worry about. Once your paperwork is registered and your fees are paid, you can move on to your next loan, your next home, or to being the proud owner of your property’s Title.
Are you looking for a more competitive home loan rate? If so, then contact refinancing.com. Our brokers have access to 100’s of products and have helped thousands of Australian’s secure the right home loan at more affordable rates.
Thinking of switching to a new loan to take advantage of a lower rate, to reduce your repayments, or to take advantage of any of the other benefits of refinancing? The first question a lot of homeowners ask is, how much equity do you need to refinance?
If you haven’t paid down your mortgage enough, refinancing may not be worth it. Find out how much equity you need before you should think about applying for a new loan.
What Is Home Equity?
Equity is the amount of ownership you have built up in your home, both through your initial deposit and the repayments you have already made on your mortgage. It is what you have already paid for towards your property.
You can look at equity in relation to your mortgage. It is the portion of your home’s value that you no longer owe. For example, if you fully own your home, you have 100% equity. If your home is worth $500,000 and you still owe $300,000, your equity would be 40%.
If your home increases in value over time, the amount of equity you have will also increase. This is because the amount that you still owe on your loan will not change but the value of the property – and your owned portion of it – increases.
The value of your property minus your outstanding loan amount is your equity.
If the value goes up, your equity goes up. As your outstanding balance goes down as you pay down your mortgage, your equity will go up as well.
On the other hand, your equity will go down if changes in the property market cause your home’s value to drop. This is because the market value for your equity decreases. A drop in value won’t change your mortgage, but it could impact you when you go to refinance your home loan. This is something you should consider before refinancing.
How Is Equity Involved in Refinancing?
The more equity you have, the more negotiating power you will have when it comes to refinancing. This is because your equity serves as the security for your new home loan. If you have a lot of equity, your bank won’t take on as much risk as they would if you didn’t have much equity – either because you haven’t been paying down your loan for long enough or because the property value changed.
The smaller the amount you owe, the lower the interest rate that you will be able to command, which could save you a lot of money in the long run. Lenders look at the amount of equity you have already built up as a measure of your ability to repay the loan in the future. For the most part, those who have higher equity tend to be more reliable borrowers.
How Much Equity Do I Need to Refinance My Mortgage?
With initial home loans, you can often get a loan with only a 5% deposit. However, in the case of refinancing, you’ll want to have at least 20% in equity, and even more if you are a self-employed borrower.
Although there are some lenders that may be willing to refinance your loan for a lower amount, you will need to pay lender’s mortgage insurance (LMI). In most cases, the added cost of LMI can make refinancing not worth it for you.
What If I Do Not Have 20% Equity in My Home?
In today’s more conservative mortgage environment, you may want to think twice about refinancing right away if you haven’t a lot of equity in your home. With total household debt at 200% of disposable income in Australia, there is still pressure on banks to be careful about handing out new loans.
You may want to wait until you build up more equity by paying down more of your mortgage. By paying down your loan faster with extra repayments, you may be able to reach your equity target a lot faster, making it easier to refinance sooner. You can use a mortgage calculator to see how much quicker you could reduce your outstanding balance at your current interest rate.
Likely your best bet, however, may be to hold off on refinancing until you have built up at least 20% equity. Not only do you want to avoid having to pay LMI again but you also will be able to qualify for a better loan with a lower rate and other attractive features, when you have more equity.
Refinancing With a Guarantor
If you are really struggling to make your current mortgage payments and absolutely must refinance to obtain a lower monthly repayment, you could refinance with a guarantor. A guarantor is another person who takes responsibility for repaying the loan if you become unable to meet your repayment obligations. Typically, this is someone like your parents or another close friend or family member.
You may also have better luck with private lenders, who may have less strict rules for mortgage refinancing than major banks. Smaller lenders will be more likely to take the full picture of your unique financial situation into consideration, rather than looking solely at your equity as a measure of your ability to make repayments.
When done at the right time, refinancing could save you a lot of money, or you could use a new loan to help you meet your financial goals, from better budgeting and debt consolidation to investing. But, rushing in to refinance just because rates have gone down a couple of years after you took out your home loan or to try and lower your repayments to get some financial breathing room could backfire if you aren’t in a strong position to refinance.
Compare lenders, compare the numbers, and talk to a mortgage specialist or other financial professional for any questions or guidance you may need.
Nothing lasts forever. In fact, most things in life aren’t going to last for the next 20 or 30 years, or however long your mortgage term is. Which is why home loan portability is such an important feature. It’s something you’ll probably end up using at some point.
Let’s face it, life isn’t going to revolve around your mortgage. A new job. Family changes. A desire to relocate to another city. Or, simply being ready to move on from the home you once fell in love with. All of these factors could mean you end up moving houses, possibly years sooner than you had expected when you took out your loan.
It’s actually more common to move around every ten years or so than it is to stay put. According to the Australian Bureau of Statistics, typically around one-quarter of Australian adults, both renters and homeowners combined, are in the same house for over 15 years. 30% stay in the same home for five to 14 years and 43% have moved by the time five years are up. Looking purely at homeownership, the RBA estimates the average holding period of a property to be about 17 years.
Which means, chances are, when you are moving, you still have a mortgage to pay off. The typical Australian mortgage term is set for either 25 or 30 years. To switch to a new one to purchase a new house, you’ll have to refinance your home loan – unless you have loan portability.
This feature could save you thousands of dollars and a lot of time and effort when you have to move by allowing you to keep your current loan.
While refinancing can be a beneficial process when you want to invest in property, pay for a renovation, or save money; when in the midst of searching out a new place to call home and transitioning to your new location, the last thing you want to do is refinance.
Instead of hunting around for a new mortgage while you are hunting for your new house, you can use your current mortgage’s loan portability feature. Find out what loan portability is and how it can make your life a lot easier during a move.
How Loan Portability Works
Because more and more Australians are moving, whether for work, family reasons, or just to experience a new location, most home loans offered today include a portability feature. With home loan portability, you can keep your existing loan product and can continue making your mortgage repayments without skipping a beat when you move. Your lender will allow you to switch the security – your new house for the old one.
The Advantages of a Portable Loan
This isn’t just convenient. It will also take a lot of the stress out of the moving process altogether.
You’ll be able to keep the same accounts that are related to your mortgage, such as your associated ATM card and bank accounts. And, you’ll still have the same rates and features, which is a huge advantage if your original loan came with a low interest rate or if you currently are paying a fixed interest rate. Otherwise, you may have to pay penalties for closing your fixed interest loan to switch to a new one for the new house.
The best part of portability is, you won’t have to pay any loan establishment, exit, or application fees because you aren’t applying for a new loan product. You’re merely swapping securities. This could save you hundreds of dollars or more – which is money you can spend on moving costs, not refinancing.
Getting Loan Portability Right
But, there’s a catch. Depending on the rules of each lender involved, you may have to worry about getting the timing right for portability to work.
While advantageous, loan portability in action can be tricky to navigate. First, you’ll have to have both of your properties settle on the same day. This can be stressful and may require some planning and lots of communication with your loan vendor and purchaser. Not all lenders share this rule so make sure you verify.
Second, as you’re keeping the same loan – your loan amount won’t actually change. If you need more funds because your new property is more expensive, you’ll have to apply for another home loan. On the other hand, you may also be able to top off your current loan to make up for the difference. Check with your lender if this is an option.
You also may benefit from refinancing if you were thinking about it anyway. Experts recommend doing a home loan health check every year to make sure your mortgage is working for you. A lot of homeowners end up refinancing every three to seven years. If you could refinance to a cheaper rate, switch to a loan with better features, or you need to adjust your repayments, the term, or even the loan amount so you can take care of other financial goals, then refinancing could make more sense.
It all depends on your financial goals, as well as how your current loan compares to what you may be able to qualify for today.
Portability or Refinancing?
The key to getting loan portability right is to find out the specifics of your loan portability feature. Make sure you are clear on the limitations, as well as the flexibility. You will also want to talk to your lender and to consider the help of your broker or another specialist to ensure everything goes smoothly. After all, that is what the loan portability feature is designed for – to make your mortgage one less thing to worry about when you move.
Then, take a look at your financial goals right now and assess your existing loan. Will it cover the purchase price of the home you want to move to or will you have to top it up? Could you save by refinancing to a lower interest rate?
If you are happy with your current loan and want to focus on the move, home loan portability could be a lifesaver. Just ensure you want to keep the loan you have now. If you aren’t sure, compare your mortgage with loans that are available on the market today and talk to a financial or mortgage specialist for help. Making the best decision for you in the long run will give you the most peace of mind.
What’s the biggest mistake Australians make when refinancing? Not understanding the full costs of refinancing a home loan.
Switching to a new mortgage could save you a lot of money if you do it right. It may also help you meet other important financial and lifestyle goals like debt consolidation, paying for home renovations or investing. If you rush into it, however, the often unpredictable financing expenses can turn your refinancing dream into a real nightmare.
As of the beginning of 2018, Canstar found the costs of refinancing to range between $700 and roughly $3,800. Depending on how your new loan compares to your current terms and features, you can still benefit from refinancing, even if you end up paying the higher end of the spectrum. However, it will take a couple of years of repaying your new loan to recoup your costs.
|Costs of Refinancing a Home Loan|
Source: Canstar. Data are accurate as at 30/01/18. Data based only on standard principle & interest loans for fixed and variable terms.
Careful calculation beforehand can help you avoid unwanted and unexpected refinancing expenses. This means taking an in-depth look at what you may have to pay and weighing that up against how many months it will take you to come out even with your new loan. You can use ASIC’s MoneySmart’s mortgage refinancing calculator to help you get a clearer idea of the costs vs. the benefits and the time it may take to recoup your costs.
So what are the costs of refinancing your home loan? Here is a list of expenses and fees to look out for and some tips to help you avoid these sometimes excessive fees.
Exit Fees You May Pay When Refinancing
Some home loans come with automatic exit fees, which means you will pay for terminating the loan too soon. The fees can be rather heavy, costing thousands of dollars in some cases. Exit fees will be based on either:
- A set fee
- A percentage of the remaining portion of the loan
But, there’s good news. If you took out your mortgage in the past couple of years, you might not have to pay any exit fees. As of 30 June 2011, lenders have not been able to charge exit fees. This means any loan that originated on 1 July 2011 or after will not come with exit fees.
And bad news.
Unless you have a fixed rate mortgage. If you are repaying a fixed rate home loan, you’ll likely incur break costs for leaving your loan early, even if you took out your loan after 1 July 2011.
Look at your loan contract or call your lender to find out if you have to pay any exit fees. Then, figure out how much they will be, depending on if it is a set fee or a percentage of your mortgage balance. You may simply want to wait until the fixed rate period of your mortgage is over, and your loan switches to a variable rate loan before you refinance. This way, you can enjoy the benefits of switching to a better loan, whilst saving on some of the biggest fees.
What is Lenders Mortgage Insurance?
LMI, or Lenders Mortgage Insurance, is charged when the borrower is taking out a mortgage for more than 80% of the value of the house (LVI). If your home has dropped in value recently, your loan-to-value ratio will also have changed, which means you may not have enough equity to be able to avoid LMI. This can make your monthly payments uncomfortably larger.
To avoid these refinancing costs, you will need to provide at least 20% of the new mortgage. If your home has decreased in value and you don’t have enough equity, consider waiting until the value of your home increases again. You’ll stand to gain a lot more from refinancing when you aren’t adding LMI to your refinancing costs.
Which Will Incur More Costs? Fixed or Variable Interest Rates?
The cost of switching loans is one of the biggest drawbacks of fixed rate home loans. Whilst the predictable repayments that come with a fixed rate can make budgeting a lot easier and can protect your loan from interest rate increases, fixed mortgages aren’t always the best deal in the long run.
- If there are considerable exit fees, the costs of refinancing could make changing loans not worth it.
- You’d have to refinance to a new loan with much lower interest rates to see any significant savings.
When replacing a variable rate loan, it is often easier to actually save money when refinancing. This is because with a variable rate, the interest rate, and thereby your mortgage payments, will fluctuate. Some homeowners choose to refinance simply to take advantage of lower rates when the standard rate falls. The money that is saved within a year, if it is enough of a change in interest rates, could easily offset the refinancing costs involved.
What Should I Consider Before Refinancing?
You always want to compare rates. Sometimes, other lenders will lower their rates, whilst you are still paying a higher rate with your lender because they haven’t changed their rates. This means you could be missing out on huge savings.
It is a good idea to check with other lenders to determine what kind of deals and refinancing costs might be available right now instead of assuming your current lender is offering you the best deal.
Before beginning the process or refinancing, you need to know:
- All the fees and refinancing costs involved
- The total cost of the mortgage over the entire course of the loan
These are the figures and costs of refinancing a home loan you need to calculate to understand whether or not you are getting a good deal.
While refinancing is often a promising option, you need to be aware of the costs of refinancing when thinking about getting a new mortgage. The fees may be excessive in some cases, but they can be avoided if you do your homework and search and compare home loans, and are clear on all your expenses.
Refinancing your home loan could be a great way to save money, but you need to time it right. There is no limit to how many times you can refinance your mortgage. However, just because you can, doesn’t necessarily mean you should.
Here’s the thing. When you switch to a new loan, you could potentially save thousands in interest by changing to a lower rate. You may also be able to pay down your loan faster with the right features or lower your monthly repayments to help you manage your budget.
On the other hand, you’ll also have to cover the costs of refinancing every time you go through the process. Another risk is your credit; if you don’t qualify for your new loan, you may end up hurting your credit score when you apply, which can make it even more challenging to qualify for a competitive loan in the short-term future. Multiple inquiries into your credit history can make you appear like a riskier borrower.
The key is to know when to refinance your home loan. And yes, there is a sweet spot.
It’s a good idea to evaluate your mortgage about once a year to make sure it’s serving your financial situation and to decide if the timing is right for refinancing. Even with an annual check-up, you’ll still probably only switch loans every few years. A recent survey found that 61% of Australians refinance every five years.
Use this guide to decide if right now is a good time to refinance or if you should wait. Knowing exactly when to refinance can help you avoid costly mistakes and could save money in the long run.
Find Out If There Is an Early Repayment Penalty
Before even starting to compare rates and looking at the offers different lenders have, check to make sure you won’t have to pay a penalty for renegotiating your loan. A lot of mortgages include penalty clauses, which means that a penalty will be applied if you try to pay off the mortgage early, which is what happens when you refinance, and your new lender pays off the old mortgage.
Be sure to find out the following;
- If a penalty fee is included in your home loan contract
- If the penalty is a fixed fee or a percentage of the loan balance
- How much will it cost?
Because the amount of the fee could be large, you definitely want to look at your contract, check the details, and calculate the exact amount. It could end up costing you more than what you’d gain by refinancing, which is an indication that now is not the time to change to a new loan.
Consider the Value of Your Home
One thing a lot of people don’t consider before refinancing is home value changes – until they’re already well into the process and may have spent money to apply for a new loan.
With property, values are constantly moving – the real estate market is always shifting with prices rising, plateauing, falling, stabilising and rising again. This means, a few years after you take out your mortgage, it’s quite possible that the value of your home will have decreased.
While you may have had a lot of equity a year or two ago, you may not have enough now to handle the new loan. For instance, if your home has decreased in value, then:
- You may no longer have enough equity in it to get a new mortgage.
- You may need to pay LMI, which will increase the cost of refinancing by thousands of dollars
- Your payments could be higher than they were before.
Look at current home values on the market – have they gone down or up?
You can also pay a professional to do a valuation of your home. If you aren’t sure what your property is worth, paying a couple hundred dollars to get a reasonably accurate assessment of your home value may prevent you from making a costly mistake by trying to refinance at the wrong time.
Research Current Interest Rates to Know When to Refinance
To save on interest, you’ll want to refinance to a loan with a lower interest rate. This means you’ll need to pay attention to current market rates to see if it may be a good time to refinance now. You want current rates to be lower than the rate you are paying now. Financial experts recommend determining when to refinance by:
- Waiting until the rate is at least a half-percentage point below what you have now.
- Keeping your eye on interest rate trends.
- Watching to see when they start to drop, but not waiting for too long.
- Locking in your rate when it is at the rate you are sure it will be profitable to refinance.
Decide How Much Longer You Will Live in Your Home
Knowing how long you intend to live in the new property will also help determine when to refinance and still profit. Consider the following about the future:
- Do you plan to stay at least as long as it will take you to recoup your costs for the new mortgage?
- Do you plan on having more children? Will you have to move in a few years anyway if your family increases in size?
- Are you nearing a point where the kids have grown up, and you may downsize to a smaller home in a few years?
- Have you considered moving for your career?
Think about life changes over the next few years. If you end up moving before you recoup your refinancing costs, this could destroy any savings you may have gained.
Think About Shortening the Term
Many people think about getting a shorter term on their new mortgage. This often looks attractive, and it will help some people because it can:
- Reduce the interest rate.
- Reduce the amount of interest paid over the life of the mortgage.
- Raise the amount which is paid off each month.
When deciding on a time to refinance, you will need to determine if you can comfortably afford the increased cost. After all, you don’t want to take on more than you can handle and end up having to take on personal debt just to keep up with a higher repayment.
Determine the Overall Costs and Compare
Before buying into what appears to be an attractive deal on a home loan, take some time to determine the total costs involved. Understanding all of these figures will tell you when to refinance your home and how to get a good deal. This means considering:
- All fees
- Early repayment penalties
- Getting a reassessment on the house, and more
When to refinance? This can only be determined by carefully considering all the details of your situation and comparing the home loan you already have with the other options available. Selecting the right options can enable you to not only know when to refinance but will also let you potentially save thousands of dollars and give you more financial freedom each month with lower payments.
If you are overwhelmed by your credit cards, personal loans, and other debts, you should look into refinancing your home loan so you can consolidate. No one plans to build up a sizable credit card balance or end up with more loan repayments than they can keep track of. But, the reality is, life is unpredictable. And, unpredictable can become expensive.
Unless you have a solid emergency fund in place to cover job loss, unplanned relocation, and braces for the kids, you’ll have to get personal financing to cover your expenses. The more debt you have, the harder it is to get out of.
Many Australians use a debt consolidation loan to help reduce their debt load and save money. When you refinance, you can roll all of your debts into one, manageable payment. Plus, you’ll get to use your home loan interest rate, which is likely significantly lower than your credit card rates. Are you in a good position to refinance so you can consolidate debt?
How Does a Debt Consolidation Loan Work?
Often the driving force behind debt consolidation is to lower your repayment amount. When you refinance, your repayments will decrease with your lower home loan rate and a longer term.
For example, if you started with a 30-year loan and you’ve been paying down your mortgage for three or four years, and then refinance to a new, 30-year home loan, your mortgage repayments will decrease. If you wanted to include $25,000 of your other debts into your new loan, you could refinance to cover this amount as well, slightly increasing the repayments on a new 30-year loan. The result? Lower monthly mortgage repayments and you’ll only have to make one repayment each month, simplifying your finances.
What Are the Benefits?
With a new loan and one repayment amount, you’ll finally have your debt under control. You’ll have a repayment amount that fits within your budget and can save money with a lowered interest rate. A debt consolidation loan will also protect you from missing payments or even declaring bankruptcy if you had previously reached a point where you couldn’t manage your debt.
This means less stress. Having manageable payments can take a huge weight off your shoulders. Also, you’ll have extra cash to save – you can even build up a better emergency fund so you’ll be better prepared to deal with a car repair, medical bill or other unexpected expenses in the future.
How Do You Know a New Loan Is Right for You?
Refinancing does come with some risks. You’ll have to pay refinancing fees in order to switch to a new loan. If your credit isn’t as good as it was, you may not be able to refinance to a competitive rate, which means you won’t save as much money as you had hoped by consolidating. You should rethink refinancing if you have to borrow more than 80% of your home’s value. Borrowing over 80% will mean you’ll have to pay lender’s mortgage insurance.
To assess if this option is right for you, sit down and talk with a mortgage specialist or other financial professional. You need to examine how much you’ll save when you consolidate and make sure it is more than the amount you’ll pay in refinancing fees. Also, keep in mind when you refinance to a longer term, you’ll increase the overall interest you’ll pay. Debt consolidation can make your life a lot easier. Just make sure you work out the costs and benefits to decide if it is worth it for your unique circumstances.