Are you angry with the big banks for putting their rates up and thinking of switching lenders? Before you do, read the YMM guide to ensure you’re making the right move.
1. Make sure you refinance for the right reason
Re-financing your mortgage is a useful option for:
• Consolidating your debts: pooling together your other debts, such as credit card into a single credit facility with your mortgage can reduce your debt obligations. This is because the interest rate on a mortgage is typically lower than say, the interest rate attached to a credit card. It’s important to “split” your payments to keep track of your repayments.
• Releasing equity: if the equity in your home is greater than the outstanding amount on your mortgage, re-financing may allow you to use this equity to make other large purchases– such as upgrading your car or renovating your home - by securing additional funds. This can be a difficult process as it depends on the lender’s valuation of the equity in your home, so it’s best to seek valuations from three real estate agents.
• Moving to a lower interest rate: many banks have recently lifted rates on their variable loans, largely due to the rising cost of wholesale funds in the global credit markets. However, the better loan isn’t necessarily the one with the lower interest rate; it’s important to factor in other costs and fees (see below) to determine whether switching lenders will save you money overall.
• Switching from low-doc to full-doc: low-doc borrowers are considered to be riskier customers as they supply less documentation to support their financial history. As a result, they face a higher rate to compensate for the added risk. If you can gather the paperwork to prove you’re financially stable, you could apply for a full-doc loan to get a discounted rate and greater flexibility.
2. Work out what it will cost
Shifting to a better deal doesn’t come without some fees, so read over the fine print to see if you could be charged for any of these:
• Break/exit costs (although deferred establishment fees have been abolished, you can still get penalised when exiting a fixed-rate loan)
• New establishment/application fees
• Loan approval fees
• Settlement and handling fees
• Additional mortgage stamp duty
• Additional lenders mortgage insurance (LMI)
• Mortgage registration
• Account fees on the new loan
Only consider refinancing if you can recoup the costs within 12 to 18 months. As a rough rule of thumb, you’d ideally want to get at least 0.75-0.8% off your current rate to make it worthwhile.
3. Make sure the new loan will REALLY save you money
Use this checklist to work out if switching mortgages will save you money.
|Early termination penalties (ask your lender)|
|Costs of establishing a new mortgage (ask your broker)|
|Mortgage stamp duty|
Interest savings over term of the loan
• Use the calculator at www.yourmortgage.com.au to work out the total interest cost of your current loan
• Now enter the details for the new loan, if the total interest paid figure is lower, the difference between that number and the total interest paid on your current loan is the amount saved
• If your current mortgage has ongoing fees, multiply that monthly fee by the number of months in the loan term (30 years = 12 x 30, so if you pay $10 per month, the calculation is 12 x 30 x 10 = $3,600)
REMEMBER THE GOLDEN RULE: If your costs (A) are greater than your savings (B), you should not refinance. Only re-finance if there's a real net saving at the end of the day.
4. Be prepared before you apply
It’s important to be aware of other factors that could get in the way of your ability to re-finance:
• Financial history: like applying for your first home loan, potential lenders want to see a squeaky-clean credit history
• Loan-to-value Ratio (LVR): many lenders set a maximum LVR (the value of the loan as a ratio of the value of the property) of 90% for refinancing borrowers. If your LVR is close to this figure, lenders may not want to offer you refinance. If, for example you bought a property two years ago for $600,000 and have paid down $15,000 of the principal loan amount, the value of your home would need to have increased by at least $45,000 before you can have a shot at refinancing.
• Lenders’ Mortgage Insurance (LMI): if your original loan amount was over 80% LVR, you probably would’ve paid LMI – cover to the lender should you default on your loan. If you switch lenders too soon and your LVR still exceeds 80%, you’re going to have to pay a fresh lot of mortgage insurance. LMI costs thousands of dollars.
• Your loan amount is too small: refinancing a loan amount of around $150,000 or below is likely to cost you more than you gain in the long-term, because lower interest rates or fees save you less the smaller the amount of money you owe.
4. Ask the right questions
Before jumping ship, have a chat with your prospective lender – or get a broker do the talking – and ask the following:
• Can I make interest-only payments?
• Am I able to make additional or more frequent repayments?
• What fees do you charge if I pay off my loan early?
• Can I receive an interest-rate reduction?
• Is the loan fully transferable to other properties?
• Can I have an offset account linked to the loan?