Recession. Cost-of-Living. Petrol Prices. With all the uncertainty in today’s world, the question of refinancing or mortgage refinancing may be circling your mind. But how do you know when the right time to refinance is?
Mortgage refinancing is at an all-time high in Australia right now. Alarmed by the rising interest rates, homeowners are refinancing in record-breaking numbers. In fact, according to the Australian Bureau of Statistics, 14 billion dollars of home loans from 27,667 mortgagors were refinanced with new mortgage lenders in August 2022 alone, an increase from 20 percent compared to last year, and the numbers keep rising!
Estimates suggest that $44 billion worth of loans will be refinanced by the end of 2022.
And that’s not all. The value of loans refinanced in June 2022 was 17.8% higher than the year previously, with owner-occupied loans reaching 12.7 billion for the month, 24.6% higher than in 2021.
So, what do these statistics mean to you?
Reducing your biggest bill
There is one statistic that doesn’t lie, and that is the increase in household bills. As inflation hits hard, we are all looking at ways to cut down on expenses and the cost of living, but what about the biggest expense – the cost of housing? With interest rates growing rapidly from 0.1% at the beginning of this year to 2.85% by November 2022, the cost of owning a home is becoming more and more impossible to maintain for homeowners. Therefore, it is important to assess your situation and make an informed decision when it comes to refinancing or sticking with your current lender.
Why refinance? Why not stick with the existing lender?
The decision between refinancing or sticking with your current lender comes down to what you want to do, your existing setup and your circumstances. No one likes the tedious, time-consuming task of moving banks and going through the refinancing process. As trusted and expert mortgage brokers, we believe if your bank is competitive and we can make it work with your existing bank by just reducing the rate or cashing in a top-up, then sometimes that is the better option for our clients.
Whether you refinance or stick with your existing lender often varies on your current setup and loan type.
Those with a fixed-rate mortgage are facing a decision about what to do when their fixed period ends and their ‘revert rate’ begins, which usually drives up repayments. A revert rate is the interest rate your fixed-rate home loan ‘reverts to’ when the fixed rate period, introductory rate or honeymoon rate period has ended. The revert rate is typically higher than the discounted, advertised rate.
If you are near the end of your fixed-rate period, it pays to check your ‘revert rate’ to see what you may be charged when your lower rate ends. Even if you have a couple of months left when your fixed rate expires, there’s no harm in getting it reviewed or preparing what the rate repayments are going to be.
Talk to an expert about revert rates. Contact us to find out more about revert rates. We can help you look at better options, compare banks, or negotiate a better deal with your existing bank.
If you are currently on a package loan, it could pay to look at newer products.
“5 or 10 years ago, a borrower was much more likely to have taken out a package loan, and package loan rates can be much higher than a ‘no frills’ loan. So, if you haven’t reviewed your loan in a while, you are probably still paying for an expensive loan.”
Mr Mickenbecker, Canstar Group’s executive of financial service.
Rates are still competitive. More Australians are looking to refinance, which has put considerable pressure on existing borrowers to offer new products and competitive variable-rate loans. Even the larger banks are feeling the pressure to evolve.
Many investors and homeowners with variable loans are finding that their home loan repayments are changing with the lifting of the official cash rate. Australia is just coming out of a historically low cash rate period of 0.1%, resulting in a rate below 2%. When The Reserve Bank of Australia (RBA) lifted the cash rate in May 2022 to 2.35%, the lenders then hiked the interest rates for existing customers on variable mortgages. Interest rates soared above 3% for the first time in years.
77 per cent of Australian mortgage holders are experiencing some form of a mortgage rate rise, with half seeing a 5% jump and 1 in 5 up to a 10% jump.
In these circumstances, there is no harm in looking around to see if you can get a better deal.
At Finselect Group, our clients get a rate review every year to ensure we’re keeping on top of the market and to gauge what else is out there at the time, to ensure our clients are in the best financial position possible.
“There’s nothing like getting a notice from your bank saying your repayments are increasing by $50 or $100 to remind you that there might be a better answer elsewhere. And if you can refinance, even if it’s for a 1% lower rate, that reduction in your loan cost is basically insulating you from the next couple of interest rate increases. You’re effectively immune to those hikes, and that is a pretty good feeling.”
Mr Mickenbecker, Canstar.
Sometimes it pays to switch, and you may find great ‘new customer’ discounts.
‘Loyalty tax’ is the penalty borrowers incur when sticking with their current lender out of loyalty.
These borrowers could be missing out on great deals. This is because some lenders have great discounted interest rates available to new customers, often to entice them to refinance and swap lenders.
The difference between existing owner-occupier variable home loan rates and new loan variables can vary.
Research from Canstar, when analysing and comparing variable home loan rates, found, on average, the difference between new loan variable rates and outstanding loans was 0.74 PPS (percentage points). The percentage may seem small, but it could save the borrower $259 in monthly repayments.
And remember! Beware of little expenses, a small leak can sink a great ship.
When should you consider refinancing?
You should look to refinance and change lenders if:
- The current bank won’t approve what you want to do, and another bank will.
- Your current bank offers products and rates nowhere near as efficient or cost-effective as others.
- There is a change in the official cash rate.
- There is an end to your introductory or honeymoon rate period.
- You are at the end of a fixed term.
- Your economic or financial situation changes.
- You wish to access the equity in your home.
- You want more flexibility in your loan.
Why should I stick with my existing lender?
You should stick with the existing lender if:
- You enjoy your current banking experience. It is essential that you feel listened to and in control. If you have a particular bank you prefer but want to see what they offer, we can help you discover all available options.
- You are an investor with a portfolio, looking to see what is available within your current bank and looking for a rate reduction.
- There is no financial benefit in changing your existing loan.
- Your current bank is already competitive.
- Due to the recent borrowing capacity decrease, you are ineligible to refinance.
Loyalty doesn’t always pay. If shopping around and changing providers will save $5000 to $7000 a year- It’s a no-brainer!
How often do you refinance at the same bank?
Sometimes refinancing is not the best option; instead, we look to do a ‘reprice’ for our clients. A ‘reprice’ means we reduce the rate with your current lender and compare that to how the rest of the market looks. The rapid pace of increase in the current market has led to considerable pressure on borrowers, and we have seen some banks become pretty competitive within the investing space.
How often do Australians refinance?
Just like shopping around for cheaper coffee filters, it can never hurt to shop around for a better home loan deal. There are no rules on exploring a more suitable mortgage product for you to cut down on your monthly living expenses, even with a variable interest rate. We recommend a yearly review just to check in, but we refinance our clients every 2 – 3 years (3 years at a stretch) usually because their current bank isn’t competitive anymore. There’s no harm in reviewing your mortgage, especially considering the increased interest rates.
What are the risks involved when it comes to refinancing during a recession?
There are no real risks involved when refinancing during a recession. Checking the current market is a smart move for homeowners, and there are several benefits, such as locking in a lower monthly payment, a lower interest rate or accessing equity.
After all, refinancing aims to ensure you are better off financially than with your previous loan.
At Finselect Group, we always ensure that refinancing is feasible and will benefit the client in the long run.
We always make sure that:
- Clients should see the benefits within the first three months of the loan. If it is going to take longer than that, it may not be feasible for the client to refinance.
- We speak to the clients about their goals, objectives and circumstances to see if it will be feasible to refinance and match them with a perfect loan for their situation.
- We weigh up both options by reviewing our client’s circumstances and setup.
We may find they benefit from a rate reduction with their current lender instead. If we find a more competitive option, better pricing or better loan structure, we move to refinance.
We will not suggest refinancing if it will not place the client in a better financial position post-settlement.
Your loan should fit you, your current circumstances and your current goals
After refinancing and finding the best product for your financial situation, we’ll be in touch once a month for the first 3 months, to ensure the new loan works for you:
We work for you. Not the banks
At Finselect Group, we want you to feel listened to, have a personalised experience, and know that your financial health is always our number one priority. Therefore, we do an annual review with our clients (unless stated otherwise). Annual reviews touch base to see if your current loan still matches your needs and goals, to check the current rate and see if anything needs to change.
We find an annual review works well for our clients, so they feel in control of their finances and understand all options available to them. Some clients even opt for a 6-month review for not just their loan rate but also their financials, where we put budgets in place to pay off their loan quicker.
The goal and the Australian dream is to be mortgage-free at a certain age and continually push to repay your loan sooner.
Sure, a mortgage is set out over 20 – 30 years, but that does not mean you need to repay it within that time. Let’s face it- no one wants a 30-year loan attached to them.
Ask yourself ‘How quickly do you want to pay off the loan?’ What am I comfortable with repaying monthly?
Most people don’t ask themselves these questions, and when rates were low, the majority of the market was just looking at the number of the rates rather than the monthly repayment costs.
But repayment should be the number 1 focus.
If you’ve got a good interest rate, but the repayment does not meet your goals and objectives, the rate means nothing.
Let’s take two scenarios:
Scenario 1: You are offered a 6% rate and pay your loan off in 15 years.
Scenario 2: You are offered a 1.5% rate, but you pay off your mortgage in 30 years.
Half the time, you will pick the 15 years. And that would be the smart choice.
Don’t fall into the trap of looking at the interest rate ‘bragging rights’.
Sure, rates are important. But not always. Anyone who has a 1% or 2 % mortgage rate is not always winning in life. Whoever pays off their mortgage at a disciplined time, that’s the person that’s winning.
Therefore, low or high rates for our business make no difference; in the end, we are all striving to get you mortgage-free as soon as possible.
Mortgage expert tips & tricks:
3 ways to get you mortgage-free:
- Look to pay your mortgage weekly or fortnightly rather than monthly. As mortgage interest accrues daily, you will save on interest with weekly repayments.
- Utilise an offset or redraw facility the correct way.
- Set a household budget & pay a little on top of the minimum repayment.
At Finselect Group, our primary goal is to educate clients on how to get rid of their mortgage, so they don’t need to worry about the rate. Our Accelerated Program helps you do just that.
What is the process of The Accelerated Program?
We put financial plans in place calculated on how soon our clients wish to repay their mortgage.
We ask clients to send statements to ensure they are keeping on track with the programme in place for them If clients aren’t sticking to the plan, we will review it and manage it from there. We will make amendments if necessary to ensure our clients feel in control and confident going forward.
WE will contact the clients once a month for the first 3 months, then we will then have a 3-month ‘cooling off’ period where the client should see the new plan’s benefits. After six months, we will reassess and make amendments to the program to suit their current circumstances and financial situation. We will repeat that process every six months, ensuring they stick to the schedule and alter it if necessary.
Think of it like a personal trainer, but for your finance.
Break costs, refinancing costs and the fear of rejection.
We have clients who have been with the same lender for 4-5 years because they are happy with that bank. We have clients that have been with the same bank since they were children because they take comfort in the familiar. We also have clients who are scared of the break costs, refinancing costs and the fear of being rejected. Every circumstance and reason for the uncertainty is unique to that person. Therefore, we get to know you, discuss your options, and put your mind at ease.
Refinancing costs can be scary, but they don’t need to be. Refinancing costs are typically low, and in the long run, small upfront costs can save you thousands recouped in repayments, compared to sticking with a bad loan.
What fees do I have to pay when refinancing?
Refinancing costs consist of:
- Government fees- These vary from state to state.
- Discharge costs- These vary from bank to bank.
- Valuation fees – usually waived in some circumstances, depending on the lender.
- Land registration fees
- Lenders Mortgage Insurance (LMI) – if applicable
- Ongoing fees – depending on the loan provided.
- Break fees – depending on the existing loan that if it is fixed.
What’s the average cost to refinance a mortgage?
See below for the average cost to refinance your mortgage and the refinancing fees.
Source: Canstar.com.au – 28/07/2022. Based on principal & interest loans for fixed and variable terms on products rated by Canstar in the July 2022 Monthly Star Ratings. Minimum, Average and Maximum calculated based on products that do charge each type of fee. Total Fee calculated based on the sum of all listed fees for each product.
The overall refinancing costs vary due to several factors, such as the type of loan you currently have, the lender you are currently with, and the refinancing loan and lender.
At Finselect Group, we estimate your refinance charges, compare the repayment difference between the two loans and advise you on the product that suits your needs.
We also add other fees (some might say the ‘hidden fees’) into your estimation so that you get transparent and honest advice from a mortgage broker you can trust.
We don’t like surprises, and nor should you when it comes to refinancing costs. Therefore, for peace of mind, we like to add $800- $1000 in a surplus, which avoids a nasty shock when your refinancing costs are charged. We offer transparent figures and over-estimate fees, so you are never left in red or dark when refinancing fees are deducted. We then deposit the remaining surplus money back into your account.
Refinancing costs depend on your individual circumstances. Contact us today for more information and a more accurate calculation of fees associated with discharging your loan. We will check all the documentation you signed at the start of your loan, including the Key Facts Sheet (KFS), Target Market Determination (TMD) and the terms and conditions. We will also advise you on any sign-up fees with the new lender you are considering.
But what about break costs?
Many Australians wish to break their loan but fear break costs on a fixed mortgage. Break costs usually apply when the rate you’re trying to break is higher than the bank’s current product.
For example, if you have fixed-in your mortgage at 4% and that bank’s fixed rate today is 3%, you will pay a break cost based on the rate difference.
However, because fixed rates are skyrocketing, 9 times out 10, you will not get charged based on how some of the banks calculates their break costs.
If someone is fixed-in at 2% but the same product today is at 5%, there shouldn’t be any break costs. This is because the bank is losing money on you being at that lower rate.
Sure, it is important to keep in mind that refinancing comes with costs, and not everyone may be eligible, but refinancing can save you thousands in the long run, and it doesn’t cost to check.
- Every bank will calculate it differently.
- Every bank has its own calculation for break fees and uses the change in wholesale rates to calculate your exit fee, so this is an estimate only. Contact your bank for an exact figure.
- Some lenders will pay you a refinance cashback which can offset the cost of your break fee.
Who can refinance?
You must meet the new loan serviceability requirements to be able to refinance. If you have a good credit score, a steady income, a healthy record of repayments, and have enough equity, you have a good chance of getting refinanced.
In some cases, for clients who entered the property market with bad credit, we’ve also been able to help them refinance onto a better product even if their credit is still in bad shape.
Access equity in your home
If you have paid off a reasonable amount of your home loan, or the value of your home has increased, you may be eligible to refinance by accessing the equity in your home. Refinancing is a great option to access the equity in your home, where you take advantage of the increased equity you have built up. To refinance using your home equity, you need to borrow on the balance of your existing loan. Lenders typically lend you up to 80% of your current house value.
Things to consider when accessing the equity in your home to refinance:
- It is essential to understand that if your fees and interest rate remain the same, your repayments will increase, and the goal of paying off your mortgage sooner may be challenging.
- You could find yourself entering into ‘Negative equity’. Negative equity is when your property’s market value is lower than the remaining balance of your home loan.
- It is important to note that every lender has their own eligibility requirements and criteria for approval.
Everyone’s situation is different, and some borrowers may not have the necessary equity or reach the threshold criteria banks are looking for. Lenders typically allow borrowers with 20% equity at the time of refinancing.
If you paid less than a 20% deposit, your existing loan is relatively new, or if your property value has dropped, you may not be eligible for refinance. There is no minimum time duration, but someone who owes more than 80% of the value of the property at the time of refinancing may be open to paying Lenders Mortgage Insurance again, even if they’ve already paid it with another lender.
How to make sure your refinancing application doesn’t get rejected
Fear of rejection is never fun.
Before submitting any application, we conduct due diligence by serviceability checks to ensure our client meets the criteria. The broker’s job is to line up the specific client to what bank and products suit their circumstances. Based on the client’s financial position, a broker can infer whether they will fit that bank’s criteria. It’s the broker’s job to make sure that the loan has been put at the highest percentage of success rate approval. We never submit something if we are not almost certain it will get approved.
Of course, nothing is 100% guaranteed, and sometimes a loan may be rejected if the client hasn’t disclosed something the banks have picked up on. That is why it is crucial to form a relationship with our clients and an understanding of transparency and openness. We like to understand our client’s needs, goals, circumstances, financial portfolios and assets to suit them with the perfect loan every time.
We must also lay our client’s options on the table based on the current borrowing capacity and the market. Borrowing capacity has decreased significantly since the rates have changed. Therefore, for a certain market of people, there will be quite a number that cannot refinance.
Can property investors ensure they qualify for refinancing during a recession?
Absolutely! Times are uncertain, and it has never been more important to check what is out there and if it’s time to invest in a new lender for your investment portfolio.
Rule of thumb, we always look to review our clients’ portfolios every year and a half to 2 years maximum. Just to review.
Reviewing your investment portfolio and the current rates may not mean you have to refinance. In fact, a lot of the time, all we need to do is call the bank to reduce the rate, which does not have to be done through a refinance process.
Is the cost of refinancing a home loan worth it?
Yes, refinancing can potentially save you thousands. Although the reason for refinancing and their fees can vary significantly, it is essential to weigh the pros and cons of every situation to determine what decision is best for you. You must always ensure that refinancing puts you in front financially and that the costs of refinancing are recouped at least a few months into repayments.
How much would a homeowner in Australia save by refinancing compared to staying with an existing lender during the recession?
How much you can save will depend on your new loan, but on average could see you save around 0.78% on the loan rate. Calculating the new percentage on a $500,000 mortgage means you can save $3,889 in the first year on interest.
These savings more than covers the average break out and refinancing costs, even if the fees are at the higher end of the cost spectrum.
Within five years, you could save a whopping $19,120, which is more than significant enough to check.
And remember, it’s not all doom and gloom. Sure, times are uncertain, and mortgage rates are rising, but advice is available if you need it.
Don’t risk your future. Work with the best and take control of your financial journey.