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It's Not Me, It's You


For any number of reasons, you may find your current loans are no longer working for you and may be considering refinancing. If so, you’re not alone. In September 2013, more than a third of new mortgages in Australia were for the purposes of refinancing*. Meanwhile, an Ernst & Young survey found more borrowers were looking for a better deal but found the process of switching lenders confusing and time-consuming**. In this edition of Property Insight we take a closer look at refinancing and the potential benefits of doing so.


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What is refinancing?

Refinancing essentially means restructuring your debt in an effort to benefit your financial situation. By moving to a new lending product you replace your current debt obligations with new ones, usually under terms that better suit your current financial position.


Why would I refinance?

When managed correctly, refinancing can reduce your total mortgage payments, shorten the term of your loan and/or help you build equity faster. It can also be a valuable tool in getting your debts under control. Here are some reasons you might consider refinancing:

To get a better deal: The Ernst & Young survey found 65 percent of borrowers felt they should be rewarded for their loyalty, yet many lenders continue to be reluctant to pass on official interest-rate cuts. On average, Australian banks passed on 116 percent of each rate rise and only 84 percent of each cut***.

With interest rates at a historic low, now is an excellent time to consider refinancing your lending portfolio with the goal of paying off your property sooner. Depending on your circumstances, refinancing could in some cases see you save tens-of-thousands-of-dollars each year off your loan. When considering refinancing, take into account all fees and charges and ensure the new arrangement is in line with your long-term financial goals.

To access equity: Equity is the difference between your property’s value and how much you owe on it. If you own a home valued at $500,000, for example, and you owe $300,000 on your mortgage, then you have $200,000 equity. Many investors use the equity in their principal place of residence to purchase investment properties and build wealth.

Refinancing is a great opportunity to access the existing equity in your home. Speak with your financial adviser or accountant to see if this strategy would suit your financial situation.

To consolidate debt: You might be shopping around so you can bundle personal debts, such as credit cards, store cards, car loans and personal loans, into your mortgage, with the aim of securing a lower interest rate. Consolidation can be a valuable tool in getting your debt under control, but it must be given a great deal of consideration. Warning! Make sure you don’t find yourself paying off your existing debt over a longer period, therefore paying more interest in the long run.

For more flexibility: Your circumstances may have changed since you originally secured finance. You may wish to move from a variable to a fixed rate, particularly if you believe the Reserve Bank is looking at increasing rates. A young family, for instance, may find this stability more appealing. Others may wish to move from a fixed-rate loan to a variable rate. In most circumstances, there is a ‘break’ fee associated with this that needs to be taken into account. When reviewing your loan options, consider your circumstances and plan for the future.

For extra features: Each stage of life brings different needs and priorities. You may want to take advantage of features that aren’t included in your current loan product, such as extra repayments, offset accounts, redraw facilities and portability. Previously unnecessary features may now allow you more freedom or the ability to pay off your home loan sooner.


When should I refinance?

We recommend investigating your options every three years whether you make the switch or not. Critical factors include:

  • How much you owe on your existing loan and how long it will take to pay it off.
  • Your earning potential now and in the future.
  • How long you plan to stay in your existing home.
  • Whether your living costs will increase in coming years (by having children, for example).

The cost of switching

Many borrowers are concerned about being stung by exit fees, which may discourage them from switching their home loans. While it’s true there are costs involved in refinancing, they are less these days than in the past. Early exit fees were abolished in 2011, meaning any loans that were entered into after this date will not be required to pay this fee. However, break costs may still be applicable on fixed-rate loans.

Generally, you can expect to pay:

  • A discharge and registration of mortgage fee of about $190.
  • A settlement fee of $100 to $250.
  • An application and valuation fee of about $600.

Some lenders entice borrowers with payments to help offset switching costs. Most will also offer a discount on the application fee or waive it altogether if existing customers are switching to a different loan product under their umbrella.


Get the facts

To help you understand all the pros and cons of a loan product, ask the lender for a fact sheet. Many lenders don’t offer these upfront, but they are required to provide one if you ask. Fact sheets provide all the information in a set format making it easier to compare loans. They also highlight important information, such as the total amount to be paid back over the life of the loan. This is where the comparison rate is useful for borrowers.


Comparison Rate

By law lenders are required to include a comparison rate when advertising an interest rate for a loan. A comparison rate encompasses fees and charges relating to a loan product, and is represented as a percentage of your loan.

The comparison rate includes the interest rate as well as the fees and charges relating to the loan. For example, a loan option may have a low interest rate, such as 4.87%, however the fees and charges would make the comparison rate 5.22%. This makes it easier for borrowers to understand and compare their total expenses for each loan option.

The comparison rate above of 5.22% can be used to compare different loan products and includes the following:

  • The amount of the loan
  • Term of the loan
  • Repayment frequency
  • Interest rate
  • Fees and charges associated with the loan

Refinancing can be a valuable exercise, saving you thousands of dollars and years off your loan, thus helping you reach your financial goals sooner. However, it can also be confusing and time-consuming. Make sure you have all the facts and a good mortgage broker can be an invaluable asset to guide you through the process, as it doesn’t need to be stressful.


Talk to us

The aim of refinancing is not just to reduce your monthly repayments, it should be about finding a product that will save you money and reduce your loan period by years.

At Which Property Financial Services we use our extensive knowledge of the finance industry to find the most suitable loan for your needs. We take the time to get to know our clients, gaining a full understanding of your current financial situation. We can save you time and effort and determine whether refinancing is the right move for you.

Which Property Financial Services has access to over 25 lenders with more than 600 products. We will research and compare hundreds of loans to see if there is a way to save you money. And we won’t just stop at a lower interest rate, we will examine every layer of the loan to ensure that product is suitable for you.


Case study

Jack and Taylor are ten years into their home loan with ABC Bank. They have paid $209,857 (Principle: $50,708. Interest: $159,149). The balance left on their loan is $249,292.

If Jack and Taylor stay with their original loan, they will have their home loan paid off in another 20 years and will have paid an additional interest amount of $170,424.

They have noticed XYZ Bank is offering an interest rate of 4.87% and call their mortgage broker to find out if it is worth refinancing. Jack and Taylor’s goal is to pay off their home loan as quickly as possible so they are debt-free.

By refinancing with XYZ Bank, Jack and Taylor will save $121.44 on their monthly repayment. Over the course of 20 years, they will pay $141,276 in interest, which means a massive saving of $29,148.

But what happens if Jack and Taylor decide to take the loan with XYZ but maintain the loan payments they were paying ABC Bank? By continuing to pay a higher rate, the couple saves a further $17,458 and shaves two years and two months off their loan term, achieving their financial goal.

 


 


* AFG Mortgage Index
** Quantum Research
*** Australian Economic Record

DISCLAIMER: Whilst the publisher and author believe that the information contained in the publication is based on reliable and researched information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Anyone who intends to use the information as the basis for making financial or business decisions should first obtain advice from a qualified professional person. This article is published on the understanding that neither the publisher nor the author - is responsible for the results of any action taken on the basis of the information published; and is not engaged in rendering legal, accounting, professional or other advice or services. The publisher and author expressly disclaim all liability and responsibility to any reader of this publication as a consequence of anything done, or not done, by a reader relying upon any part of this publication. (C) This article may not be reproduced in full or in part without the specific written consent of Which Property? and the Author.

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