If you have a home loan and you’ve recently turned on the news you would’ve no doubt heard them say ‘interest rates are rising’ and ‘you should look into refinancing’, but what actually is refinancing? In simple terms, refinancing is where you pay out the loan with your current lender and establish a new loan with a different lender. You can refinance for several different reasons, some being:
To get a more suitable interest rate
To get access to new loan features i.e. offset account, redraw facility, etc.
To access equity in your home to renovate, invest or travel.
To consolidate debts such as a personal loan, car loan, credit card, etc.
There are a few key things to consider when looking to refinance your loan which are:
The equity within your home
You can only borrow 80% of your properties value (to avoid Lenders Mortgage Insurance) so when looking to refinance the property valuation becomes important. Let’s say you have current debt of $500,000 against your owner occupied property which is valued at $700,000. Your ‘maximum borrowing’ is $560,000 ($700,000 x 80%) so a refinance in this scenario would be fine as the Loan-to-Value Ratio (LVR) is 71.43% ($500,000 / $700,000).
The costs involved
Whilst you may be able to refinance to a more suited interest rate it’s important to compare the costs that will be incurred vs the benefit. To refinance lenders will charge fees such as an Application Fee, Legal Fee, Settlement Fee, Annual Package Fee, etc. and there will also be fees from the Solicitor who arranges the refinance.
Any Cashback offers
Some Lenders will offer you a cashback if you refinance your loan to them as an increased incentive. Whilst it shouldn’t be relied upon, if the loan has a more suited interest rate, extra loan feature you may be after or allow you the ability to consolidate your debts it can be a nice added bonus.
If you fixed an extremely competitive rate during COVID then your repayments are going to increase when this fixed period ends. But be sure not to fall into the trap of thinking ‘rates have gone up, so I won’t bother looking into it’ because you’d be surprised by how much potential savings are still on offer. To show this see the below scenario (all rates and amounts below are for illustrative purposes):
Refinance Scenario
Cameron & Sarah own their owner-occupied property which has a $800,000 loan with Lender A which was fixed for 2 years back in 2021 at a rate of 2.09%. Their fixed period is expiring in one month so they reach out to see if they should refinance. Their current lender has offered them the following:
Variable Rate – 5.70%
1 Year Fixed – 5.75%
2 Year Fixed – 5.80%
3 Year Fixed – 5.85%
Cameron & Sarah have stated that they would like to fix their loan for 2 years, so I ran a comparison with all the lenders I have available on my panel, and I was able to get them a 2-year fixed rate at 5.50% (a 0.30% discount). Not only this but this lender was offering a $2,000 cashback at the time. By refinancing however there are fees incurred and these will vary depending on who the lender is (and whether you want to lock the fixed rate) but an illustrative example can be seen below:
*These fees are used for illustrative purposes and shouldn’t be relied on as every product is different*
As seen from the above, whilst there are approximately $1,568 in fees by refinancing to Lender B from Lender A the client will save $4,800 in interest over the 2-year period (as they got a 0.30% discount) and received a $2,000 cashback so their net gain over the 2 years is $2,832.
Every situation is different and there are always several different variables to consider but as a Mortgage Broker, I can help you navigate the different scenarios. I always act in your best interest and would never recommend a refinance unless it was advantageous to your financial position. To get a free refinance comparison please contact myself on 0401 225 713 or lmckean@lbkprivatelending.com.au.