Tips for refinancing your home loan
When being amongst the joys of home ownership you may have had one of the lowest rates at time of settlement but now you have come to realise the rate isn’t so sharp anymore and the loan product you have in place is no longer working in your favour. You find now that your ultimate goal is to obtain a lower rate and in turn cheaper repayment either with the same lender or another reputable lender.
How to improve your chances of approval, a cheaper interest rate and lower repayment
There are a number of things you can do to help your chances of obtaining approval when it comes to applying for finance. Your financial situation on paper will need to be able to demonstrate that you have the capacity to be able to repay the loan.
If you have the ability and are able to cut down on unnecessary financial commitments and any personal debt owing such as personal loans, credit cards, and interest free cards. It is simple if you have a credit card that is at zero it is much more beneficial to finalise/cancel the card completely as this is no longer a liability that the lenders will need to factor into their risk assessment.
You will need to prove you have the ability to put aside/save a set amount each week generally for a period of 6 months, the lenders want to see that you have some personal discipline and are not blowing your weekly pay on fast food and going to the cinemas or making daily visits to the local pub and such of gambling venues. Lenders need to see good conduct of your use of money.
If your home loan is on P&I repayments make regular additional repayments, not only does it show you are keen to pay a little extra off your loan but the amount paying down compounds and before you know it you will be shaving months if not years off the total loan term.
Don’t go to a number of different lenders physically and apply for pre-approvals as this in many cases will constrain your ability to be able to borrow come time you are ready for the application process. The reason for this is even though you haven’t exactly applied for finance, you still have hits on your credit report and many lenders will ask questions and may assess their level of risk around these findings. If this is the case you may not be entitled to the most suitable product and lowest rate applicable for your situation.
You will need to show you have stable employment and that you are stable when it comes to holding down employment. Many lenders will require a minimum of 6 months however there are lenders who will look at 1 payslip providing you are full or part time usually with an employment contract to evidence this, however this is case by case.
Finally, make sure everything has been disclosed such as your personal debts, credit cards, car loans, bad credit situations, pretty much anything that is related to finance whether it be good or bad. It is better for your broker to know from the start as opposed to finding out late in the process by the lender. If you talk to a mortgage broker it will really pay off in your favour as it is up to them to deliver on your request to find you an overall cheaper more cost effective loan product that has all the bells and whistles most suited to your situation.
How to pay off your loan sooner
There are many things you can do to help yourself and pay down your home loan prior to the 30 year loan term banks offer. If you have the capacity to and you want to pay down your home as quick as possible you may want to choose a variable rate home loan as there is no limit on how much you can pay down each year as opposed to fixed rate loans where you have a cap you can’t exceed without incurring a penalty. Don’t stress though if you are in a fixed rate loan and you wish to pay over and above the capped amount, once the fixed term comes to an end you can revert to variable to allow for flexible extra repayments.
If your loan was initially set up for monthly repayments and you have the ability to, look at your options to change the repayments to weekly or fortnightly to line up with your pay going into your account. If you were to pay $1000 per fortnight as opposed to $2000 per calendar month, by paying fortnightly you actually pay an extra month’s worth of repayment come the end of the 12 month period – i.e. $24,000 based on monthly repayments or $26,000 based on fortnightly repayments.
If you sell an unused car surplus to your collection or get some money back at tax time, think about what you will gain by placing the lump sum of funds into the home loan. Chances are you weren’t depending on that money prior to it physically coming into your possession. If you have an offset account set up this will also work in your favour providing you have the correct structure in place where it is working to your advantage. Look at an offset account as a smart way of saving on your home loan, if you are unsure whether an offset account is suitable for you don’t hesitate to talk to a mortgage broker about your options.
Consolidating debt within your home loan, can this be done?
Consolidating debt into your home loan is a common action many homeowners exercise. This is achieved by increasing the total home loan amount utilising the surplus funds achieved to payout your debts giving some relief from the high interest rates and high monthly repayments as seen on personal loans and credit cards. For some, it is easier to focus on one repayment instead of multiple repayments being debited over different dates. If you reach this point you need to take a step back and think “Are the current debts in place really needed and are there any ways of eliminating them without having to refinance your home loan?” When done correctly, refinancing your home loan can help you be able to manage your finances much easier.
To be in a position to consolidate your personal debts into your home loan you will need to have equity available and be able to demonstrate you can service the loan with the lender. You will have the ability to go to 80% LVR without LMI or in some cases up to 90% LVR with LMI, if you are in this territory it is important to talk with a mortgage broker as not all lenders will be favourable to this and it may not be the most suitable option which your broker will be able to research and explain to you.
What do the banks look at when refinancing?
Many of the lenders will conduct their own credit scoring based on their independent model in place, in some cases this is more beneficial to you in respect to the lengths they will go to look over your situation. If you’re an existing customer of a specific bank then the assessment team will search over all of your accounts, credit cards, personal loans and home loans statements and will count the number of times you have overdrawn an account or been late with a payment. Having just one or two missed payments in the last 12 months is enough to result in your loan application being questioned. Banks do not share this data with other banks unless the new lender requests a specific statement which shows the default.
Can you save money refinancing?
Many Australians refinance their home loan to minimise their repayments. While refinancing your mortgage can help to lower your periodic repayments, it’s important to consider the costs of refinancing before making a decision. If done correctly utilising the services of a mortgage broker, refinancing can save you thousands over the lifetime of your loan.
What are the costs involved to refinance?
While you may have the ability to refinance your home loan to a new lender with a loan product offering a cheaper rate than what you have currently, there are some costs associated with carrying out a refinance and should be taken into consideration as the fees and charges may outweigh any form of cost effectiveness.
- Mortgage registration: Fee payable for the registration of the new mortgage on a specific property.
- Discharge Fee: Your lender who you currently have borrowings with will charge a fee for discharging the loan.
- Establishment Fee: Fee charged by the new lender for the initial set up costs of the loan, however many lenders now offer cash back rebates if you refinance to them from another lender. The amounts on offer in many cases cover the total costs to move from one lender to another making it far more achievable and cost effective eliminating the fees payable by the client
If you have any queries or a question regarding what else is involved with refinancing, interest rates on offer or to find out your options, click here to talk to your mortgage broker Gerry and he will be able to assist with answering any questions.