Get to know the ins-and-outs of refinancing your home loan.
Whether you’re seeking a cheaper interest rate, looking to borrow additional renovation funds, or wanting to get ahead with an offset account – there are many good reasons to consider refinancing your home loan.
While refinancing can provide many advantages, it’s important to understand what you’re getting into – and decide whether it’s actually right for you – before you jump in.
1. Refinancing costs
There will always be some costs associated with refinancing a home loan. In some cases, it can sometimes set you back thousands and leave you wondering if it was worth it.
To avoid any nasty surprises, look at the terms and conditions of both your existing home loan and the loan you’re looking to refinance to and figure out what additional refinancing costs will be. These costs include government charges, discharge fees, valuation fees and ‘break’ costs.
If you’re refinancing to get a lower interest rate, you should discuss with our Lending Specialists how much less you will pay in interest at the new rate and compare this to the total cost of refinancing. This will give you an idea of whether refinancing is worth it.
If you have enough equity in your property, the costs associated with refinancing can be included in your new loan. Alternatively, you can pay them from your own funds to reduce any additional interest charges on these costs.
2. Property value & equity
No matter what your reason for refinancing, you need to consider the current value of your property and how much equity you have in it. Your loan-to-value ratio (LVR) reflects your equity. If your property value has risen, your LVR could be lower, and you will have more equity in the property. This may also benefit you in gaining a better rate with tiered interest rates available.
Keep in mind, the property could also be valued at less than what you think it is worth.
When refinancing to access some of your equity – for example, to pay for a renovation or to invest it in another property – you’ll generally be able to borrow up to 90% of the property’s value minus the outstanding debt. So, if your property was worth $1 million and you had $600,000 owing on the mortgage ($400,000 in equity, 60% LVR), you may be able to borrow an additional $300,000 to take the loan to 90%.
But remember, borrowing any more than 80% may require Lenders Mortgage Insurance to be paid, so some of the additional funds would need to be used to cover that premium. It could also result in a higher interest rate.
3. Credit rating
Refinancing means an application for credit, so it appears on your credit report and can influence your credit score. Lenders can be wary of those who refinance too often, or regularly shop around for the best deal.
When shopping around, you don’t necessarily want to put in multiple applications at once to see who will offer you the best option. This could result in having numerous mortgage enquiries on your credit report and that can sometimes affect your credit rating and your ability to refinance.
When considering refinancing, you need to also consider affordability – and with the current interest rate rises, your affordability could change from one day to the next.
Even if you are just looking for a dollar-for-dollar refinance with the same term you have remaining on your loan, there are other factors to consider. One major factor is what we call a ‘servicing buffer’. Under Australian Prudential Regulation Authority (APRA) guidelines, all institutions must add 3% to the current interest rate you are eligible for. So, you may currently be paying your home loan comfortably at 4%, but when looking at your affordability, the bank must look at your affordability as if the rate is 7%. If your circumstances have changed since you got your present loan, like changing jobs, a change in family circumstances or having more debt, this will also be considered.
5. Loan term
Think about what loan term you’re refinancing to and be mindful that while refinancing to a longer term can reduce your regular repayment amount, the total cost of the loan will be more because interest is accruing over a longer period.
Refinancing to a shorter term has the opposite effect, increasing your regular repayment amount but saving you on the total interest payable.
Want to deal with a local bank and have direct access to your Lender? Book an appointment to talk about refinancing today.