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Refinance
Why Should I Refinance?
Tired of paying interest? We don’t blame you and because we don’t work for a bank, we have no incentive to make you pay more than you need to. Loyalty to your bank is great but there may be other options where you can save money on interest.
Lower Interest Rates & Cash Contributions
Interest Rates
Banks set different interest rates depending on a range of factors and your current bank may not have the lowest interest rates available in the market. Mortgage Specialists have access to a panel of lenders and deal with these banks on a daily basis so we know who is offering the best deals. Together, we can take a look at your situation and see if there are better options out there. Banks regularly provide discounts below the rates that are advertised.
There is no push to refinance unless it provides you a benefit so if you are unlikely to get a better offer with another bank then we will let you know. Using a mortgage advisor to look at options is free and there is no obligation but it could lead to saving you thousands.
Cash contributions
Banks want you to choose them as your lender, so as an incentive they will provide a cash contribution. This is a payment made to you and is based on a percentage of the loan amount. The banks aim is to provide this incentive up front and over the years of you paying interest they will make this back. The cash payment can be up to $20,000!
The contingency with this payment, is if you were to move lender or repay the lending within a certain period, the bank can charge a claw back fee. This claw back period can be up to 4 years, but most lenders will scale down the amount they claw back after each year. It depends on the lenders policy so make sure you are aware of these terms when you accept the cash offer. It is something to consider both when you’re looking to leave your current lender and when you accept a new cash contribution.
Loan Structure
Refinancing your home loan can present a good chance to review your loan structure to make sure you are most effectively paying down your loan.
Fixed Interest Rates
> In the case of a fixed-rate loan, there are set minimum repayments and restrictions on additional payments so shortening the loan term can be a powerful tactic to pay down your loan. While this increases regular repayments, it accelerates the payment of principal, resulting in less interest paid over the loan's life. Our Loan Calculator demonstrates the impact of altering loan terms on repayments and total interest costs.
> Opting for a shorter loan term, while effective, lacks flexibility in case you need to lower your repayments. Banks will often limit the amount of additional payments you can make over the minimum repayments.
Floating Rates
> A floating rate, although typically higher than fixed rates, offers flexibility in making increased repayments without incurring fees. It operates similarly to a fixed rate but is subject to change, potentially lowering or raising the minimum repayment.
Revolving Credit
> For even more flexibility in making additional payments, a revolving credit can be a great option. It operates similar to a Credit Card Limit where interest is only charged on the balance owing.
Interest is calculated daily and charged at the end of each month. Therefore, the longer you maintain a lower balance, the less interest you'll pay.
> The biggest advantage of a revolving credit is any funds you input into the account can be taken out of the account again. In context, if you had a $100,000 limit on a revolving credit and had paid off all the balance so there was $0 owing, then you can withdraw any amount up to the $100,000 credit limit. You can do this at your own discretion without needing bank approval.
Offset Account
This operates in a similar way to a revolving credit but can be a bit easier to understand visually. This structure will have some or all of the loan on a floating rate which can be offset by other accounts. For example if you were to have a $100,000 portion of your loan on floating and 3 offset accounts, one with $20,000, the other $4,000 and your everyday account at $1,000 then you would only be paying interest on $75,000. Using offset accounts instead of a revolving credit can make budgeting easier, by still saving into separate accounts and making P&I repayments against the floating portion.
Debt Consolidation
Short-term debt and credit cards often come with higher interest rates and shorter terms, which leads to high ongoing repayments. This can strain your budget and make you feel like you're taking steps backwards. To get on top of your short-term debt, a debt consolidation can be very useful to reduce your repayments and save on interest.
Taking debts that were unsecured or secured with a vehicle can be added onto a residential home loan to access lower interest rates and have more flexibility in the loan term.
Positives
> Home loan Rates are typically lower than the rates offered for personal or vehicle loans. This is becuase a residential lending is secured by your property, providing the bank with less risk. A top up can be added to your home loan within LVR criteria in order to close out the other loans you wish to consolidate. This gives you access to residential rates and extended loan terms out to 30 years.
Extending the loan term can lower your ongoing payments, but it means you might pay more in total over the life of the loan. If you use a vehicle as security, the interest rate might be higher, but your home stays separate from this loan. The loan term is typically set at a maximum term of 7 years, more often around 4 years.
Negatives
> There are some risks with debt consolidation. If you can't pay back what you owe, the asset used as security could be sold to recover the funds. Debt consolidation is a step in the right direction that takes the burden off, but the main risk is getting back into further short-term debt. To sustainably benefit from a debt consolidation, further short-term debt should be avoided or minimised.
Cost vs Benefit
While a refinance can save you money, there are costs to completing the process, so it is important to weight these up with the benefit. The cash contribution is designed to help cover these costs and hopefully have some left over to be paid to you.
To complete a refinance, you will need to engage a solicitor to register the new bank as the mortgage holder of your property. Based on our experience, this charge is usually between $900 to $1,500.
You may also be charged a claw back from your previous lender if you only received your last cash offer recently (typically within 3 or 4 years ago). Most of the time this will be scaled down after a year, so the new cash offer could outweigh this clawback.
In some cases, we may need to get a registered valuation which can cost around $1,200 (dependent on the property). We would try to avoid this where possible but there are times when getting a valuation to demonstrate a higher value against your property would be very beneficial. This is especially the case when you have a low equity margin that we are looking to remove or reduce.
Together, we'll weigh up the costs of breaking the loan with the benefit in either lower interest rates, a different structure, a cash contribution, better policy, or a combination of all 4. Your needs are unique, and you might already be with the bank that suits you best. If you want to take a look at your options, a quick chat with one of our specialists can help you figure it out, and it won't cost you anything.