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

 

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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 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. 

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

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.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

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 apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

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.

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 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.

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.