Ever heard of refinancing? This is when you swap out one home loan for another, often to take advantage of a lower interest rate.
Right now, there are some great refinancing deals around.
Before we explain what those deals are, let’s explain why lenders offer refinancing deals in the first place.
Australia’s mortgage market is intensely competitive, with dozens of lenders competing hard for business. One way lenders try to grow their mortgage books is by luring borrowers away from rival institutions. How? Often, through refinancing deals.
Some lenders offer frequent flyer points or lender’s mortgage insurance (LMI) discounts to entice borrowers to make the switch. The most common type of refinancing reward, though, is cashback.
Refinancing generally costs money: you might have to pay fees to close your old loan, open your new loan, value your property and register your new mortgage. The upfront cashback payment is designed to cover these costs; indeed, sometimes, it exceeds the costs. Right now, there are lenders offering up to $5,000 cashback.
Refinancing solely to get cashback or frequent flyer points is a bad idea, because refinancing costs money and takes time. So there has to be another motivation.
One motivation might be to switch to a better home loan. As mentioned earlier, Australia’s mortgage market is very competitive, so if you took out your loan more than three years ago, there’s a good chance a better loan is now available – even if your loan was the best at the time.
A ‘better’ home loan could mean a comparable loan with a lower interest rate – which might be easier to find than you think. That’s because lenders often charge new borrowers lower rates than existing customers. For proof, check out the graph below, from the Reserve Bank of Australia. As you can see, owner-occupiers who took out new variable-rate home loans in January (the bottom line) were charged an average interest rate of 2.52%. By comparison, owner-occupiers who had taken out variable loans in the past (the top line) were charged an average of 2.94%.
If your financial circumstances were tight when you took out your home loan, it’s possible you might have been forced to pay a higher interest rate (as lenders sometimes charge higher rates for borrowers deemed to be higher-risk). If your circumstances have since improved, there might now be more lenders willing to do business with you, and at lower interest rates.
But a ‘better’ home loan doesn’t always have to mean a loan with a lower interest rate. A new loan with the same interest rate might be better if it offered more repayment flexibility. Alternatively, you might want to refinance from a variable to a fixed-rate loan, given that the Reserve Bank plans to raise official interest rates sooner or later, which would prompt banks to raise their variable rates.
There’s another reason you might want to refinance. As you probably know, there’s been an extraordinary property boom going on, with Sydney’s median price jumping by an extraordinary 17.7% in the year to March, according to CoreLogic. If the price of your property has increased during the past year or two, your ‘equity’ – or the share of the home you own outright – should have increased as well.
Imagine, for example, at the start of 2020, your home was worth $1.5 million and you owed $1 million on the mortgage. In that case, your equity would’ve been $500,000 (i.e. $1.5 million minus $1 million). Since then, your home might’ve risen in value to $2 million and your mortgage might’ve fallen to $950,000, in which case your equity would’ve increased to $1.05 million.
The reason that’s important is because you might be able to borrow against your equity, via a refinance. Generally, lenders will let you take out a loan equivalent to 80% of your equity. You could use this new loan to pay for renovations or to fund the deposit on an investment property.
If you do want to refinance, you should never pick a particular lender solely because it’s offering a tempting refinancing deal. That’s because another lender without a refinancing deal might offer better overall value. But if a lender is offering a good loan at a good interest rate and is throwing in a good refinancing deal as well, that might very well be your best option.
Refinancing never suits all borrowers at all times. But it might be suitable for you right now. If so, it’s something you should seriously consider.
To discuss your options, you can call us on 1300 416 700, email us on firstname.lastname@example.org or fill in this online form.