Unlock Equity, Refinance & SAVE!
Did you know, if your property has increased in value, the amount of equity held in that property will have gone up too?
You can then refinance your mortgage to access that increased equity, which can then be used to cover the deposit and all costs on another property purchase. Refinancing can also give you the opportunity to snap up a lower interest rate. Do you even know how much interest you are paying?
While most Aussies can remember their phone number (94%), number plate (77%) and parent’s phone number (76%), new research from UBank has revealed 85% of Australians don’t know their home loan rate. Of those surveyed, 44% could only recall an approximate figure for their home loan rate while the remainder (41%) simply didn’t know their rate at all. (source: ubank.com.au)
With the pandemic still prevalent worldwide and interest rates near an all-time low here in Australia, the next 12 months is looking like a great time to think about a refinance to unlock equity and save money in the long run. It may also be a great opportunity to consider shortening your mortgage’s term in the process.
The latest data from the Australian Bureau of Statistics (ABS) shows that $8.9 billion worth of home loans from over 19,000 mortgage holders were refinanced between March and June 2020.
One of the main reasons to refinance is to lower the interest rate on your existing loan. Generally, the rule of thumb is refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.
Our recommendation would be to weigh up the reasons you may want to refinance as well as looking at any hidden costs to do this. Further, many lenders offer a refinance rebate to assist you to ‘make the move’. Simply put, if you can recover your costs quickly, refinancing could save you a bundle over time.
But….is it really worth refinancing to save $100 a month?
The answer is Yes!
Let’s break it down: If you’ll save $100 a month on a $200,000 mortgage, and your cost to refinance is $1,200, you’ll break even in 12 months. If there is a refinance rebate of $2,000 you will be ahead right from the start.
Right now, Australian home owners with an average mortgage size of $489,159 could save $273 per month by switching from the average variable rate to the lowest rate. To put it into a wider perspective, these homeowners could save $98,275 over the course of 30 years.
Depending on your budget and circumstances, there are other refinancing options that might suit you better. These include:
- Construction loans are suitable for structural work in your home, for example, if you’re adding a new room or making changes to the roof. The HomeBuilder incentive has seen many larger renovations come into play.
- This was $25,000 and will become $15,000 from 1st January 2021.
Home loan top up
- You keep your current mortgage but borrow a little extra. This is effective for borrowing smaller amounts but keep in mind that adding to your mortgage means it takes longer to repay and costs more in interest.
Redraw on your mortgage
- If you’ve made extra repayments on your mortgage and your mortgage has a redraw facility you could pull that money back out to cover your renovations.
Line of credit loan (Home equity loan which is much less popular currently)
- Also known as an equity loan, to be eligible, one must be looking to make upgrades to the cosmetic domain of their property.
- For example, installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction can fall under a line of credit loan.
When looking to refinance in 2021, we know the circumstances have changed for many Aussies due to the pandemic, so you may be wondering if you can still refinance while unemployed. You will need to take into consideration if your financial situation has recently changed, meaning you may need to wait until you have been employed for 3-6 months before a bank or lender will consider your loan application. Many lenders want to see proof of income to know that you’re able to repay the loan. So, while refinancing during unemployment is difficult, it’s not entirely impossible.
2020 has also seen a delay in applications being approved because lending standards have tightened tremendously since the financial crisis. Many lenders also have extended wait times throughout the process. In order to get the lowest mortgage rate possible with the lowest amount of fees. Your credit report has also become much more important as it records your payment histories on any credit facilities.
As a result of extended timeframes, the refinance applications are put on the backburner compared to home purchases. Banks purposefully prioritise home purchases because banks understand there is always a time frame in which a transaction must get done. We generally see refinances taking 4 to 6 weeks, whereas a year ago they may have taken 2 to 4 weeks for full approval.
Even though applications are taking longer, looking forward, we estimate the cash interest rates in Australia to stand at 0.10 in 12 months’ time. So you have time! The cash interest rate is not matched by home loan interest rates, however they are a good indication of movement. In the long-term, the Australia Interest Rate is projected to trend around 0.25 percent in 2021 and 0.50 percent in 2022, (Source: Australia Interest Rate | 1990-2020 Data | 2021-2022 Forecast)
Remember, when refinancing, you have the option to choose a ‘fixed’ or ‘variable’ rate. The advantages and disadvantages include:
Fixed mortgage rate:
Advantage: The repayments on your loan will be fixed for an agreed term meaning that your repayments will not be affected by changes in official interest rates or your lender’s variable rate. This is good if you are on a budget.
Disadvantage: The downside is, you will not be able to take advantage of lower interest rates. You will also be up for significant costs if you have to make changes and you have to break the fixed term.
Variable mortgage rate:
Advantage: The interest rate is subject to change throughout the loan term at your lender’s discretion. Because the interest rate varies, you’ll benefit from any reduced rates and have lower repayments. You can also make unlimited extra repayments and you can get dollar to dollar benefit from your offset account.
Disadvantage: There may also be times when your repayments go up when interest rates increase. You will not have the benefit of knowing what your repayments will be.
You can read more on how breaking a fixed rate for a lower rate and the extra costs involved with refinancing here.
Mortgage refinancing is certainly the latest buzz right now for homeowners! But remember it is a big decision, so always discuss your options with a professional. We recommend a few steps to take before you make the switch which includes:
- Asking your current lender for a better deal
- Negotiating the length of the new loan
- Weighing up the cost of lender’s mortgage insurance
- Comparing the costs of switching your mortgage
- And get at least two different quotes on home loans for your situation
The process of switching to a new loan may seem like a hassle but it doesn’t have to be! At LHL we can help you crunch the numbers and we’ll handle the paperwork too.
Whether you want to save money on your current mortgage, consolidate debts, access extra cash or get a home loan, we can help.
Give us a call on 0439 110 255 or contact us today for an appointment.