Rebecca Jarrett-Dalton from Two Red Shoes has been in finance looking after people, just like you, for nearly two decades. She has a team of professionals who work with her to save you time, stress and, above all, money! She has been described as wearing ridiculous shoes but rarely a suit. A self confessed maths nerd, property and finance are her passions but she’s no typical mortgage broker.
Knowing when to refinance your mortgage or other loans can be an overwhelming process. Here, Rebecca gives some helpful insights into the benefits of refinancing, when to refinance, things to consider and what to do before the start the refinancing process.
Whilst refinancing can be a time consuming process, there can be many benefits to be had.
Debt consolidation, lower interest rates and lower monthly repayments are just the start. Generally, personal loan interest rates are higher than home loan rates which means that consolidating your debts into one home loan can reduce your monthly repayments significantly.
Refinancing can lead to increased loan features, such as flexible repayments, offset accounts, redraw facilities or the ability to split the loan between variable and fixed rates. It can also offer potential tax benefits if you access the equity in your property to invest in another property or shares. Speak with your accountant to determine if there are tax benefits to be had for your situation.
When to refinance
Throughout our adult lives our personal circumstances and needs change, which can often result in our financial situation changing. We may suffer a financial setback due to a divorce or separation, or have a financial windfall as a result of receiving an inheritance. Kids and changing jobs can also have significant impacts on our financial situation, or you may now be in a financial position to pay off your loan faster so you want to reduce the loan term. Our lives change and so do our mortgage needs. If you haven’t carried out a health check of your home loan for a few years, now could be a good time to compare your current home loan to what’s on the market.
Another opportunity or time to refinance is when you’re coming to the end of a fixed-term loan rate, as this is a good time to look around to see what fixed-term rates are now on offer. Utilising the equity in your home to renovate or invest in another property is also another good reason to refinance.
Things to consider before you refinance
Re-financing is considered as taking out a new loan which involves taking your current financial situation into consideration, a credit check and financial assessment to confirm you can service the new loan. Unfortunately having a current loan with a bank or mortgage lender doesn’t automatically guarantee that they’re going to grant you another loan.
Because refinancing is considered a new loan, this means there are costs involved which may also include the need for lenders mortgage insurance (LMI). LMI is a one-off, non-refundable, non-transferrable premium that’s added to your home loan if you’re borrowing more than 80% of the property value. It is calculated based on the value of the property and the amount you borrow above 80% – the more you contribute to the purchase price of your property, the lower the LMI cost will be.
Whilst LMI protects the bank, not you, against any loss they may incur if you are unable to repay your loan; it can also be costly and should be avoided where possible. However, don’t let it stop you if it’s going to allow you to achieve your ultimate goal. Instead, view LMI as a tool or pathway to achieving your goal.
Also, check with your current lender to determine if there are any penalties for discharging your current home loan. When evaluating whether to refinance, be sure to take all the costs into consideration.
Before you start the refinance process
Look at your credit card debt and reduce the limit on your cards, or better still cancel as many credit cards as you can. The reason being is, for example, if you have a credit card limit of $10,000 but you only have $1000 debt on the card, the full $10,000 will be taken into account as that’s the card limit. This applies to all the credit cards or overdraft facilities you may have.
Get your accounts in order, understand your numbers, know your budget and cancel any unnecessary subscriptions or memberships that you don’t actually need. Reduce your debt as much as possible. Remember that you are effectively applying for a new loan so you need to present your finances in their best shape possible.
Get organised. Have all your paperwork ready to go to help speed up the process. If you’re refinancing to lock in a good interest rate, the longer the process takes there’s a chance the interest rate could increase. Your interest rate is only locked in when the final paperwork is drawn up, not the rate when you first started the process.
Get your property looking shipshape. As part of the refinancing process, there’s a good chance the lender will want to have your property valued. A well presented property will help you gain a higher valuation on your property and give you a lower loan-to-value ratio (LVR). What is LVR? LVR is how lenders describe the amount you need to borrow to buy a particular property. In a nutshell, it’s the amount you need to borrow, calculated as a percentage of the property’s lender-assessed value. Generally, the lower the LVR the better as the banks take this into consideration when offering interest rates. Typically having an LVR of less than 70% will give you access to the best interest rates on the market.
Speak with a mortgage broker – mortgage brokers have access to a wide panel of lenders and can recommend a lender that will be best suited to your personal needs. They can also look at your current situation and give you some tips and helpful things to consider to save you time and money.