Five tips for refinancing your home loan

Five tips for refinancing your home loan

Refinancing a mortgage can be a great way to refresh your finances to better suit your current lifestyle. 

To help make sure your refinancing experience goes as smoothly and painlessly as possible, RateCity has put the following tips together for your consideration:

Estimate how much you can save – will you REALLY be better off?

Many borrowers refinance their home loans in order to improve their financial situations, whether by lowering their interest rates, gaining the benefits of useful financial features, or putting the equity in their mortgage to good use.

But if you do some research and make a few calculations first, you may find that a refinance may not be the most ideal option in your current financial situation.

If you’re looking to refinance to a mortgage with a lower interest rate, it’s possible that refinancing could end up costing more than you expect. Even if your interest payments would be relatively low, you could find yourself stung by ongoing fees and/or switching charges, especially if you’re currently on a fixed rate mortgage and would have to pay break costs to leave it.

 

 

If you’re thinking of switching home loans to benefit from financial features such as offset accounts or a redraw facilities, you should check if there are any terms, conditions or other restrictions around using these features with the lenders you’re considering. You could find yourself unable to enjoy the full benefits of these features, or you may have to pay extra for the privilege.

If making use of your equity is your refinancing objective, try and work out whether your project will leave you better off. If you want to upgrade to a bigger and better home or investment property, or rent out your current property and buy a new one, do a few calculations to confirm that your plan is affordable.  that you’ll be able to afford your new property. Even if on paper it looks like you’ll be approved for the refinance, that doesn’t mean your new situation will be easily affordable, especially if a surprise lifestyle change or an emergency leads to a sudden shift in your finances.

Look beyond the bottom line and compare what the different lenders are offering

It makes sense on paper to base your home loan switch on numbers. The better your interest rates, the less you’ll need to pay, and the better off you’ll be.

But depending on your situation, the lender that should look the best on paper may not be the most ideal choice for your financial situation, due to aspects of their product or service offering that aren’t taken into account by even the most thorough of online comparison calculators (yet!).

For example, some of the lenders offering some of the lowest interest rates and fees are online-only lenders, who operate entirely electronically, without any branches or shopfronts where you can visit. If you’re not entirely confident about making loan applications over the internet, or if you’d appreciate having the option available to walk into a branch and sit down with a manager to talk though your loan, these lenders may not be the most ideal options for you.

Also, if you finance with one of the big banks or a similar lender, you may also be able to take out full refinancing packages, where your mortgage comes with access to savings and transaction accounts, credit cards, or other helpful options. You may find that these lenders offer more value for your money than some of the other options.

Could consolidating debt help your finances?

Businesswomen Managing account familand expenditurey finances for income

If you’re struggling to manage your finances from month to month, you may be considering refinancing your home loan onto a lower interest rate, and hopefully reducing your monthly loan repayments.  But if you take a closer look at your budget, what if you find that it’s not so much your mortgage that’s causing your financial stress, but your other debts?

For example, if you owe money on a personal loan, a car loan, and a couple of credit cards, then you’ll have to make separate monthly repayments for each of these debts, as well as for your home loan. You’ll also have to pay interest separately for each of these debts, each one at a different (and often high) rate. If you combine the costs of all these debts, they can add up to a pretty penny.

In situations like this, it may be worth thinking about refinancing. Not necessarily to get a lower interest rate (though that wouldn’t hurt), but to consolidate your other debts into your mortgage. This not only simplifies your finances by swapping out your multiple repayments for just the one, but you’ll also only have to pay interest the once, at a rate that’s likely to be significantly lower than what you’d find on a credit cards or personal loan.

One important risk to watch out for when refinancing for debt consolidation is turning your short-term debts into long-term ones. While paying off a maxed-out credit card at a high rate of interest may be financially painful in the short term, adding this debt to your mortgage and paying it back at a lower rate over a 30-year term may ultimately result in you paying much more in total interest than if you’d kept the debts separate. Some lenders offer the option to split the balances in a consolidated mortgage, so you can pay off your property and your other debts separately, but at the same rate of interest. This can help to keep your finances under control without stretching out your repayments for too long.

Consider fixing your rate…

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While switching to a home loan with a lower interest rate than your previous one is all well and good, some of the benefits of refinancing your mortgage can be lost if the RBA starts raising the cash rate, bringing up most standard variable interest rates with it. If you’re unlucky, it’s possible that multiple rate rises could leave your refinanced mortgage right back where it started.

When refinancing, it may be worth finding out if your lender can fix your interest rate for a few years, so you can enjoy the benefits of these reduced repayments for a while, whether it’s to free up your money to use elsewhere, or even to pay extra onto your mortgage and get ahead on your repayment schedule.

Of course, this option may not be suitable for every borrower. Fixed rate mortgages can sometimes be less flexible than those with variable rates, so fixing your rate could mean missing out on some of the flexible financial features that you might find valuable.

…but beware of Honeymoon Rates!

Some lenders may try to attract your business by offering a very tempting heavily-discounted interest rate if you choose to refinance your mortgage with them. The rate may even be fixed for a period after your switch, so you can keep enjoying its benefits for longer.

However, in some cases, when the fixed period ends on these super-low introductory rates, they’ll shoot up significantly, often to the lender’s standard variable interest rate, leaving once-confident borrowers now struggling to reorganise their budgets.

These enticing low introductory rates are sometimes known as Honeymoon Rates, as they’re a great way to start your long-term commitment, but they don’t last forever.

To sidestep the worst effects of Honeymoon Rates, check your lender’s terms and conditions before signing on the dotted line, and plan your budget in advance to calculate whether you’d still be able to afford your home loan in the event of a sudden sharp rate rise.

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Learn more about home loans

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.