How to get Greater Value by Refinancing Your Home Loan (yes please!)
What’s interesting in this day and age is the largest financial commitment most Australians ever make is their home mortgage, nonetheless once their loan is settled many just set and forget it, allowing tens of thousands of dollars to just slip through their fingers. Recent credible research shows that most Australians seem to get stuck in the mud with one of the four big banks and seem reluctant to change and usually for all of the wrong reasons.
Do any of these excuses sound familiar? “It’s just not worth the effort” we say to ourselves. “I can’t be bothered with all that paperwork and there are probably a lot of costs involved anyway. Plus the local ATM is just around the corner. I’m going to have to mess around and start changing all of my direct debits and bill pays. My bank knows me; I’ve been banking with them since I was a child”. Are any of these excuses starting to sound a little familiar?
The facts are, in this electronic age refinancing a mortgage is now cheaper, simpler and faster than ever before. The biggest individual expense of any home loan is the interest cost and the potential savings that can be made with a lower rate of interest is going to substantially outweigh any inconvenience encountered during the process. As an example, if you had a $600,000 mortgage on a 30 year term and the interest rate was 4.5% and you were able to refinance to a new lower rate of 3.9% your savings would be $210 a month. Come Christmas time, there’s half a holiday for you already.
If you have been entertaining the notion, but have been a bit lethargic about working up the energy, check the following seven step guide out that will help you streamline the refinancing process:
1. Clearly define your refinancing goals
A major factor of getting the motivational juices flowing is having a clear picture of what you want to achieve. Probably the most common reason anyone would want to refinance is to save money on the home loan by getting a lower interest rate. Accessing equity in the home for other projects is another common reason, or to find one that allows them to pay the loan off more quickly because of added flexible features.
You can also use your home loan for the consolidation of any personal debts you may have racked up. The big advantage to a home loan debt consolidation is you can take all of those high interest rate liabilities such as credit card and personal loan debts and refinance to the lower home loan interest rates to give yourself substantial monthly savings.
2. Check out the available options
If you don’t already have one, get a mortgage broker onto your list of must haves and get them to do all the legwork for you to see if there isn’t a much better deal for you out there. The broker will be able to show you all the options, like whether it’s better to stay variable or if there’s a juicy fixed rate option waiting for you out there.
The broker can show you all the comparisons when it comes to what the financial benefits will be under any given scenario. You will be able to compare apples with apples as a good broker will leave no stone unturned and they’re free as the bank pays their commissions, not you. Although some loans may have a slightly higher interest rate because they have added features such as an offset account as compared to a basic loan they can quickly analyse which one is best for you.
3. Calculating the switching costs
Nothing is for nothing, when it involves banks there’s always going to be costs to the consumer somewhere when it comes to switching your loan to another lender. Typically, all lenders usually have what is called a discharge fee to cover their legal costs of transferring the property title to another lender when you pay out your home loan with them in full. The fee can range anywhere from $200 to $350, with $350 being the most common fee.
There could be other fees such as an exit fee if you signed your current loan agreement prior to the 1st July 2011 after which exit fees were banned. Although, being charged an exit fee these days would be the exception to the rule as exit fees where based on a time frame over 3-4 years and most of those would have expired by now. Nonetheless, if you still have your loan agreement in a drawer somewhere it might be worth checking.
Should you have a current fixed rate loan, there’s the possibility of having to pay what is called ‘break costs’ and under certain conditions they can be quite substantial. You can quickly check with your lender or mortgage broker for a quick assessment of your loan. Additionally there may be incoming fees with the new lender that can include a legal settlement cost and some minor Government registration fees. These wouldn’t amount to much more than $400. Having said that your home loan broker can find you hundreds of loans that have no up-front fees at all.
4. Calculating where the break-even point is going to be
Once you know what costs are going to be involved if you refinance then it can be calculated how long it would take to recuperate those costs from the savings being made with the new loan. Some situations will take longer than others; it might be 1 year or only a few months. There might not be any savings at all if there are expensive break costs involved in refinancing a fixed rate loan. Every situation is going to differ from another, so it pays to examine the numbers carefully to find out what your bottom line is going to be and if it’s worth it.
5. Applying for the refinance
It’s time to submit an application if you have found the right home loan option. Credit conditions have tightened up recently. That said, your chosen lender is going to take a close look at your income and mortgage repayment history details as well as any other financial liabilities you are carrying. Therefore if you’re at all concerned about what your borrowing capacity is going to be you might want to consider cancelling or reducing the limits on any unnecessary credit cards, or pay off as many other debts as is feasible, as they can all reduce your borrowing capacity.
The new lender will want to find out what your home is worth and to that end they will order a valuation to be completed. With most lenders these days they don’t charge a fee for the first valuation, nevertheless they may charge a fee for any additional valuations beyond the first one. There are some lenders that will allow for multiple valuations without charging for any of them.
As soon as your application receives unconditional approval from the lender they will notify you through email or through your mortgage broker with a letter of offer and after that send out a loan agreement for your signature.
6. Discharging and transferring your old loan
Once your new loan has been unconditionally approved you will need to sign a discharge form to give to your old lender, authorising them to discharge your existing loan to the new lender. The new lender contacts your old lender and gives them the signed discharge form and provides them with the funds to pay out your old loan. This process can at times be frustrating and can take up to 2-3 weeks if the old lender plays games in delaying the discharge of your old loan which frequently happens.
7. Finally the settlement
The last step of the refinancing process is the settlement and this is where the new loan funds are dispersed to the appropriate parties including yourself if you have requested cash out for any purposes.
Prior to settlement, most lenders these days will have created your new accounts with internet access including an offset account if it was requested. At the same time they will have set up direct debits for your new loan repayments. Once you have access to the new accounts you can set up any other direct debits or b-pays as long as you have funds in there to accommodate those payments.
You will now be required to make repayments on your new loan according to your loan contract agreement. However, if you have set up an offset account with your new loan this should happen automatically.
At the time of settlement your new lender will have submitted a ‘discharge of mortgage’ form to your local or regional Lands Titles Office that notifies the appropriate Government authorities that your old home loan account has been closed.
By the way, if you were to put that $210 a month saving back into your $600,000 home loan you would reduce your home loan term by 3 years and 7 months and save a massive $57,842 in interest. Forget the holiday, there’s a deposit for an investment property, what are you waiting for, give us a call?