If you’re looking to refinance but not sure where to start, read on as Your Mortgage presents your complete and practical guide to refinancing
Step One – Make a wish list and prepare
To make your mortgage to work better for you, work out what you want it to do, then find a lender and loan offers the right fit. Sort the list from most important to least important. Work out features that are ‘must have’, versus those you might surrender if the price is right.
As an investor you might aim for:
- Smart structures to maximise borrowing power based on income
Lenders have different methods of assessing different income and expense types which can affect borrowing power dramatically. For example, some lenders accept 100% of rental income, whereas others may only accept 50% or rental income.
- A better deal on fees and interest cost
It is important to consider the impact of expenses on your ROI and the trade off you may or may not make for extra features or flexibility against.
- Competitive, flexible solutions for non-investment and investment borrowings
Facilities for non-investment borrowings are more likely to require greater access and flexibility options such as offset accounts. Just remember, these benefits might be reduced significantly when applied against an investment mortgage.
- Conversion of equity to accessible cash to seize opportunity as it arises
If you think you will need accessible cash, then it should be arranged before you actually need it. Be warned, ready access to cash requires strong discipline to ensure it is invested wisely.
- Separation of security
A mix of lenders may increase your borrowing power and keep your costs down. It also provides asset insulation in the event that a repayment problem occurs on one of your investments.
Step Two – Apply the blowtorch
Go to your current lender and apply the ‘once more chance’ approach. If they offer a better solution ask them to provide a written proposal based on your individual situation that explains:
- What products they recommend to you, the respective loan amounts, and repayments
- The bottom line cost, in dollars and cents detailing all fees, charges, and interest based on either a three or five year exit. Fees and charges should include all costs to change the facilities and to terminate the loan (should it be necessary)
- How their solution fits your wish list of needs and wants
- A full and accurate list of the fees and charges you will be charged to terminate your loans with them
By asking these questions, your lender knows you are serious and this encourages them to do their best. It also provides you with an accurate amount to factor into refinancing costs when making the decision to stay or go.
Lenders interested in working with you should be able to provide you with this information within two business days
Step Three – Check the market
Shop around with lenders directly or have a broker do it for you. A high-quality mortgage broker will provide you with an apple-to-apple comparison between loans and lenders as well as making the application and refinancing process simpler and more effective.
Make sure you provide the prospective lender or broker with the same information and requirements that you have provided to your existing lender. If you change your requirements, you should start the process again. This keeps the playing field level and improves reliance on bottom-line cost when comparing different options.
Money Saving Tip: Mortgage brokers receive commissions from lenders for arranging and continuing to support your loan. An increasing number of brokers share this commission with you to reduce the effective cost of your loan. Remember, your broker has an ongoing responsibility to you and you should ask how much they will contribute to your refinance costs if you need to.
Step Four – Weighing up the cost of your options
If you have done your work properly, you should now understand what you need from your mortgage solution and have a selection of loans that meet your needs to different degrees. You should also have a bottom line cost for each of these options, which then enables you to ‘value’ features that are or are not included.
Sort each option into cost from lowest to highest, then work your way through the list until you find the right balance between cost and features. Remember to add refinance costs such as mortgage duty (varies state to state) and your current lenders discharge costs and penalties when comparing new lender options.
If your main reason for refinancing is to reduce interest cost, you should expect to recover the cost of refinancing within 18 months. However, make sure you also assign value to other advantages such as increasing borrowing capacity, which allows you to take up opportunity, or getting better asset protection, which improves the security of your current investment strategy. How much this is worth though, is up to you.
When refinancing is not for you
Refinancing can benefit the majority of borrowers if the right help is achieved and a better overall outcome found. Switching however is not for all borrowers. If you have consolidated major debt into a refinance once before, it is time to seek professional advice on your debt ratio before your mortgage health.
If you are about to sell your home or investment property you should consider refinancing after the sale as your circumstance may alter significantly.
This article was written by Michael Lee, founder of www.keyfacts.com.au