Refinancing 101: The Facts You Need to Know
Refinancing is the act of moving your loan from one lender to another or pulling out equity from your home to finance another major expense (e.g., a new property, a child’s education, a new car, etc.). Your new mortgage may come with better interest rates, meaning you’ll pay less interest month on month which can either keep more money in your pocket or you can own your home faster.
Considering the state of job security today, refinancing is mainly being done to save money. It should come as no surprise that people are looking for smarter ways to leverage the stake in their property. In fact, 75% of all home valuations from mid-March to mid-April were for the purposes of refinancing.
With so much at stake due to COVID-19, it’s a good idea to assess your current situation and see if refinancing is the right financial option for you and your family.
With Interest Rates This Low, It’s a Good Idea
When the housing market is threatened, interest rates respond in turn. Lenders may be more hesitant to approve applications right now, but if you have some degree of job security, refinancing terms are unquestionably in the homeowner’s favour. With lower interest rates, you can create more equity from your property, just in case you have plans for it down the line.
How Much Can I Save?
With the RBA’s cash rate currently at .25%, the chance for savings has drastically increased. Plenty of banks, including ANZ, Westpac, CBA, and NAB, have lowered their interest rates in an attempt to lure customers and keep the economy afloat. The best variable rates are under 3%, a number that can translate to much healthier savings accounts during an uncertain time.
Consider the following approximate numbers based on a 3.50% interest rate. If you refinanced to a 2.19% interest rate over the course of a 30-year loan, here’s how much would end up in your pocket:
|Loan Size||Monthly Savings||Annual Savings|
If you want to learn more about your own home loan, use our refinancing calculator to start adding up your own savings.
How Much Equity Do I Need?
Equity is the difference between how much your home is worth and how much you have left to pay on the loan. So let’s say you buy your home at $300,000. If you pay off $10,000 in principal after one year and the value of your home stays the same, you’ll have $10,000 ($300,000 – $290,000) in equity. However, if your home value goes up to $400,000 in the same year, you’ll have $110,000 ($400,000 – $290,000) in equity.
When it comes to how much equity you need to refinance, this amount will vary depending on the lender you choose. For the most part though, the absolute minimum is 5% of the home’s value. Ideally, you should have at least 20% equity before you think about refinancing, though this is not always a possibility — especially when the opportunity to strike right now is so good. If you want to refinance with very little equity behind you, you may be able to use a guarantor in order to secure the loan. This person will essentially promise to pay back the loan if you are unable to.
How Much Will Refinancing Cost Me?
While refinancing is definitely a smart decision for many homeowners, there are a few fees which you’ll need to consider.
Here are the common fees that you’ll pay should you choose to refinance to a packaged home loan:
- Discharge: Approx $350 , this fee is the amount your original lender will charge to release your old mortgage.
- Break fee: If you have a fixed mortgage this is something you will need to consider, Shore can help you access this cost, it changes person to person depending on the details of the existing loan
- Settlement: Up to $600 approx, this covers the legal details of settling the new loan with all parties but is also much less in most cases
- Registration: Up to $180 approx, this fee is a charge of the State Government to register your loan
Application and Valuation fees are generally waived when applying for a packaged home loan.
As high as these fees may seem, keep in mind these will be factored into the feasibility or your refinance and you could actually be charged much less, especially as lenders try to encourage more people to switch loyalties. Overall, the long-term benefits of refinancing greatly exceed the short-term costs.
What If I’m Unemployed?
Lending criteria has undergone some changes as of late, meaning you’re less likely to have the option to refinance if your income has been reduced due to coronavirus. However, if you’re likely to be hired back soon and resume your regular salary, then you may be able to work with a lender. The JobKeeper Scheme is working to keep people employed under these extraordinary circumstances. So if you have a relatively secured job in a good industry, you’re still encouraged to apply.
If you have questions about refinancing or want to learn more about how you can save, contact Shore Financial to stop overpaying, and save thousands on your mortgage. We can help you decide whether it’s the right move for you.