Six things to know before refinancing your home loan

Six things to know before refinancing your home loan

There’s no doubt that mortgage refinancing is having its day in the sun.

The number of people refinancing to an external lender ballooned by 27 per cent between March – when the cash rate was cut to 0.25 per cent – and June 2020, data from the Australian Bureau of Statistics showed. More than 19,000 mortgage holders refinanced $8.9 billion worth of home loans with another lender in June.

They may be pleased to hear they have the support of Reserve Bank of Australia (RBA) governor Philip Lowe, who urged mortgage holders to shop around for a better home loan rate, and if they get turned down by their current lender, to head to a competitor.

In some cases, making the switch can help you save on mortgage repayments. Refinancing may also be handy if you want to consolidate your other debts, including personal loan and credit card debt, into your mortgage. If you’re on a variable-rate home loan, or if your fixed-rate term is ending soon, it could be a good time to think about refinancing. Consider speaking with a financial expert for advice on your personal financial situation.

Here are six things you should take note of before refinancing

1. Pay attention to the interest rate and loan type

According to the RBA, average variable interest rates fell by 0.34 per cent, while average fixed rates for owner-occupiers dropped by 0.45 per cent in the five months to June 2020.

With such strong competition in the home loans market, it might make sense for some people to consider switching to another lender. But it’s important to compare interest rates to make sure the numbers are in your favour. It’s now common to see interest rates under the 3 per cent mark, with a select few even dipping below 2 per cent

Keep in mind, it’s just as important to understand whether a fixed rate or variable rate is right for you. While many people are opting for fixed-rate mortgages, locking in your interest rate may not be suitable for you if there’s a chance you might sell your property during the fixed rate term. Otherwise, a fixed rate can usually provide some certainty with budgeting as your repayments would generally be the same during the fixed rate term.

2. Decide what features are important to you

Only you know what’s best for you. Before refinancing, it’s wise to evaluate what you want in your home loan, whether that’s:

  • To save money;
  • Pay your loan off sooner; or
  • To use any savings you might have to offset your home loan balance. 

From here, you can then work out which features are important to you:

  • Low interest rate
  • Low fees
  • Ability to pay it off sooner
  • Ability to offset your savings
  • Package (with a credit card, line of credit, home insurance etc)

It’s likely you won’t be needing all of these features. For instance, it might not be worth stumping up extra for an offset account if you aren’t going to use it.

3. Be careful not to extend your mortgage

A common trap for refinancers is extending their loan term without even realising. This is all the more important to consider if your top priority in a home loan is to pay it off sooner.

For example, if you’re 10 years into a 30-year loan, and you refinance to another 30-year mortgage, you may actually be losing money over the life of your loan, as opposed to saving money. This is because you’re likely to be paying more interest costs for the extra years you’ve signed on for (sometimes unintentionally), even if refinancing to a 30-year home loan will make your monthly repayments lower. It could be a good idea to consult a mortgage broker for professional advice on this.

4. Check what fees and charges apply

If you decide to refinance, it may pay to check the fees and charges that could apply – both from your old and new lenders. You may not be able to dodge break or discharge fees from your current lender. But your new lender may also charge you upfront fees, and you could always try to negotiate these charges.

One way to approach the negotiation is to ask your new lender if they can waive the upfront fees. Make it clear to them that you’re considering, or even in talks with, other lenders. With raging competition among mortgage lenders, it’s possible they may say yes to pull another customer onboard.

5. Beware of the bank’s valuation

Lenders often need to revalue your property if you are refinancing your home loan. If the valuation of your property has gone down or is lower than you expected, your loan-to-value ratio (LVR) could go up. This might also affect the interest rate a lender is willing to offer you. 

Let’s say you’ve owned your property for five years, and thought the LVR of your mortgage was 80 per cent or more by now. You decide to refinance and the new lender sends a valuer to your property, who values it at less than the price you bought it for five years ago. This means the equity you hold will be less than 20 per cent, meaning the lender may charge you lender’s mortgage insurance (LMI). There’s also a chance the lender may decline your refinancing application if your LVR is too high. If your valuation comes back lower than expected, it could be worth speaking to your mortgage broker or lender, as well as attempting to get a second valuation.

6. Assess your financial position

It’s important to ask yourself whether your financial position has changed significantly since you first purchased your property. Things that might contribute to a changed financial position include:

  • New job – as this may impact your borrowing power;
  • New debts or loans – extra financial commitments may affect your ability to service repayments; and
  • Having a child – this could seriously change your lifestyle and add to your everyday expenses.

Given that banks are expected to ramp up their scrutiny on serviceability post-pandemic, it could be a good idea to consult your lender or a mortgage broker for professional advice on your refinancing approval chances. https://www.ratecity.com.au/home-loans/mortgage-brokers

 

Did you find this helpful? Why not share this news?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

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.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

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.

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.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

What is a fixed home loan?

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.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

When should I switch home loans?

The answer to this question is dependent on your personal circumstances – there is no best time for refinancing that will apply to everyone.

If you want a lower interest rate but are happy with the other aspects of your loan it may be worth calling your lender to see if you can negotiate a better deal. If you have some equity up your sleeve – at least 20 per cent – and have done your homework to see what other lenders are offering new customers, pick up the phone to your bank and negotiate. If they aren’t prepared to offer you lower rate or fees, then you’ve already done the research, so consider switching.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Do mortgage brokers need a consumer credit license?

In Australia, mortgage brokers are defined by law as being credit service or assistance providers, meaning that they help borrowers connect with lenders. Mortgage brokers may not always need a consumer credit license however if they’re operating solo they will need an Australian Credit License (ACL). Further, they may also need to comply with requirements asking them to mention their license number in full.

Some mortgage brokers can be “credit representatives”, or franchisees of a mortgage aggregator. In this case, if the aggregator has a license, the mortgage broker need not have one. The reasoning for this is that the franchise agreement usually requires mortgage brokers to comply with the laws applicable to the aggregator. If you’re speaking to a mortgage broker, you can ask them if they receive commissions from lenders, which is a good indicator that they need to be licensed. Consider requesting their license details if they don’t give you the details beforehand. 

You should remember that such a license protects you if you’re given incorrect or misleading advice that results in a home loan application rejection or any financial loss. Brokers are regulated by the Australian Securities & Investment Commission (ASIC), as per the National Consumer Credit Protection (NCCP) Act. 

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.