Refinancing is the process of taking out a new home loan to pay your existing mortgage, and it’s essentially a way for borrowers to leave their current lender and take out a new loan with a competitor institution. Refinancing is generally undertaken with the aim of saving money long-term on loan repayments, by seeking a loan with a shorter loan term or better interest rate, or to consolidate personal debt, credit card debt or other loans into a one mortgage to more easily manage finances.
Here are five reasons why now might be a good time to consider refinancing:
With interest rates currently at an all-time low it’s a perfect time to shop around for a better deal on your mortgage rate.
Following a series of cuts from the RBA to the cash rate over the last twelve months, Australian banks are able to offer competitive rates in the current market. While some banks are choosing not to pass the full rate cut on to customers, many are offering historically low interest rates, particularly on fixed-rate loans.
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Rate cuts can make a big difference to the total you pay on your mortgage over the lifetime of the loan. Even as little as a 0.5% interest rate cut on a $400,000 mortgage can save a borrower over $30,000 over a 25-year mortgage.
In a highly competitive market reliable borrowers have some power to negotiate better loan terms for themselves. While having a good credit score and at least 20% equity in your home are good ways to boost your negotiating power, there are a few things you can take into consideration to get a better deal:
While many borrowers traditionally believe that staying loyal to a bank is the more competitive way to manage their finances, recent research has shown that loyalty to an institution may not count for much.
The Home Loan Price Inquiry interim report released by the Australian Competition and Consumer Commission (ACCC) in March has shown that the big four banks focus on drawing in new customers, often at the expense of their existing customers. The increasingly competitive incentives and lower rates being offered to new customers means loyal borrowers with existing home loans are paying more as these same incentives are not passed on to them. According to the report, customers taking out new owner-occupier home loans were paying an average of 26 basis points less than existing customers.
“… our analysis shows how that even a small further reduction in interest rates could potentially save thousands of dollars over the life of a mortgage. Consumers should consider this carefully when it is time to re-engage with their lender,” said ACCC Chair Rod Sims when discussing the report.
Make it a habit to compare your home loan conditions to the newest offerings from banks once a year to ensure you continue to secure a great deal on your mortgage.
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In a competitive market, lenders look to entice borrowers to switch to their product or service through promotions and incentives such as cash back deals. This might be a cash offer but can also be in the form of gift cards or pre-paid credit cards, while other promotions include reduced or waived fees, discounts on lenders mortgage insurance, and more. Different banks have different cash-back offers available depending on the size of the loan and loan to value ratio, so those willing to do the research might be in for a decent sum.
It’s important to consider the refinance package over the length of the loan, however, and not simply sign on for a cash back bonus. While a cashback incentive might seem like a great offer, if you’ll end up paying more over the lifetime of the loan in interest or fees, or are sacrificing other loan features, you aren’t actually getting a good deal.
Thanks to the introduction of open banking in Australia on July 1, switching banks and refinancing loans is aimed to become a smoother process. Open Banking allows major bank customers to share their financial data with ACCC accredited third parties that make loan comparison much more transparent and convenient for borrowers.
This means the details registered by the borrower when applying for their existing account can be accessed when applying for a refinance loan, possibly saving time and fees on application paperwork and fast-tracking applications.
In recent months especially triggered by the effects of coronavirus some lending institutions have also introduced digital measures such as electronic mortgages, distance document witnessing and electronic document signing. The Australian Banking Association (ABA), alongside a coalition of associations, are arguing for these streamlined measures to stay in place, which means refinancing could possibly continue to be a more convenient process.
“Federal and State Governments are to be congratulated for moving swiftly during COVID-19 to use their emergency powers to facilitate these e-transactions, it’s now time to make these changes permanent to make transactions easier, keep the cost lower and reduce the hassle of transactions which rely on ‘in person’ signatures and paper documents,” said ABA CEO Anna Bligh.
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Lenders offering additional flexible home loan features can be another reason to refinance. This can include flexible repayment options, redraw facilities or multiple offset accounts.
While fixed-rate loans are presenting the more competitive value for borrowers right now, many will want to have the option for flexibility in their home loan structure in the future. Given current lower interest rates, borrowers may also want to consider split loans, allowing them to lock in a great fixed-rate on part of their mortgage while still accessing the flexible features that come with variable rate loans.
Refinancing could also allow borrowers flexibility to use the existing equity in their homes to borrow additional money to renovate their property. With state and federal government grants currently available for home renovations, refinancing to undertake a value-add renovation could a worthwhile move for property owners.
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If you currently have less than 20% equity in your home refinancing might mean having to pay Lender’s Mortgage Insurance (LMI) on your new loan. You’ll want to take this cost into account when considering what you’ll save by refinancing by weighing it against a potential reduced interest rate.
You’ll also want to consider the length of a new loan. If your lender will only refinance your mortgage under a 25 year or more loan term you may up paying more in interest even on a lower interest rate, so always ask for a similar loan length to your current one.
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.