REFINANCING GUIDE

REFINANCING GUIDE

Understand all your options, with our Refinancing Guide. 2019 ed.

John Rees

0415 152 808 john@.au .au

Mortgage Wise Pty Ltd, ABN 73 071 255 340, an authorised Credit Representative 365029 of Australian Credit Licence 385888.

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CONTENTS__

Understanding Refinancing

03

What is refinancing?

06

What is the point of refinancing?

08

When to refinance

09

Why could refinancing be a bad idea?

10

Banks

12

Interest Rates

15

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UNDERSTANDINGII REFINANCING__

Often when you borrow to buy a home, you don't think about long-term plans and how your lifestyle may change during the years you'll have a mortgage. You may change jobs several times, get married and have children, or even buy a new car, and overuse your credit card. All of these events can affect your cash flow and your ability to repay your mortgage and other debts.

Fortunately, there is a solution to swimming in too much debt; it's called refinancing. By refinancing, you're replacing your existing debt with one loan that has better terms so repayments are more manageable.

Why Refinance?

Rather than letting your debts become overwhelming, find a solution that frees up cash flow, reduces your stress and allows you to meet your financial obligations. Your answer should make paying off your debt more straightforward, and it could also satisfy your creditors so you don't incur late payment fees or attract other penalties.

Refinancing home loan debt consolidation

Consolidating all of your debts into your mortgage is called home loan debt consolidation. This financial strategy takes all of your debts ? mortgage, credit card, store accounts and car loan ? and rolls it into your home loan payment.

Consequently, you'll only have to make one payment monthly on your home loan to cover all your debts. Plus, you'll reduce any interest you pay to your home loan rate, so you won't have any hefty interest rates to worry about anymore.

So, how does home loan debt consolidation work?

Well, let's say that you owe the following:

Debt Type Credit Card Car Loan Store Card Home Loan

Amount Owed Interest Rate

Minimum Repayment

$12,500

19%

$254

$15,000

12%

$344

$10,000

9%

$202

$350,000

4.39%

$1,751

Years to Repay Total Repaid

55 years 2 months

5 years

20 years 4 months

30 years

$54,108 $20,620 $15,594 $630,215

Totals

$387,500

-

Source: .au

$2,551

-

$720,537

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Your monthly repayment for each of these accounts combined is $2,551.00. But if you consolidate all of your debts into your home loan, then you'll have to repay one loan for $387,500 at 4.39% interest over 30 years. This option will potentially reduce your monthly repayment to $1,939.00 freeing up $612.00 a month and reducing the amount of interest that you repay to $697,738, saving you $22,799.00 in interest over the loan term.

Of course, if you make higher monthly repayments, then you'll reduce the interest you repay further. For instance, let's say you decide to boost your home loan payment by $112.00 to $2,051.00 per month. Over the term of your loan, this extra repayment will reduce the amount of interest you pay by $37,547.00, and it will decrease your loan term by three years and one month.

Who can apply for home loan debt consolidation?

To be eligible to refinance your home loan, you will need to have enough equity in your home to secure your loan. Home equity occurs when the amount you owe on your home is less than the market value of your property.

For instance, let's say that your home's market value is $895,000, but you owe $350,000 on your mortgage. Based on these figures, you have $545,000 in equity in your property, which means a lender may be interested in consolidating your debts. But it's essential for you to remember that you need to leave 20% of the equity in your property to secure your loan. Therefore, you can only use 80%, or $436,000, of the equity in your property at any given time.

Some handy tools for you to use to work out if refinancing home loan debt consolidation is for you are:

Credit Card Calculator - Find out just how long it will take you to pay off your credit or store card balance if you make the minimum repayment monthly and how much you'll repay using this handy calculator.

Personal Loan Calculator - Work out how much your car or personal loan is costing you over the term of the loan.

Refinancing home loan calculator

Refinancing is a financial decision that needs careful consideration, as making the wrong move may end up costing you more long-term. So, before you apply to refinance, work out all associated expenses using a refinancing calculator. This type of calculator enables you to determine if you'll save money by switching to another home loan and will help give you an idea of just how long it will take you to recover any costs.

Let's look at how you can use the refinancing calculator to your advantage using our previous example of $387,500 of debt, including your home loan.

1. Use your `full debt' amount ($387,500) as your `current loan'.

2. Put your `current interest rate' in the `interest rate'.

3. Place the number of years remaining on your loan in `loan term'.

4. Add your annual or monthly fees to get an accurate idea of costs.

5. Next, use eChoice's `search rates' tool to find home loans that offer you competitive interest rates. Aim for a loan with an interest rate that's at least a percent lower than your original loan.

6. Print out the details of loans that you like. You can then show these to your mortgage broker or lender if you elect to refinance.

7. Lastly, enter the details of the home loan that you like the most into the `new loan' section of the refinancing calculator. Make sure you include any application, switching and ongoing fees.

The results will indicate how you'll save by refinancing and how long it will take you to recover any switching costs. Also, the refinancing calculator will show you how you can reduce the total amount of interest that you'll repay over the lifetime of your loan and decrease your loan term by paying more off per month.

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Refinancing home loan cash back

As an incentive to refinance, some lenders offer you a `cash back' deal. These cash back promotions typically range from $1,000 to $2,000 when you apply and gain approval for a refinancing loan. However, make sure you're aware of `cash back' terms before you put in a refinancing application, as these terms vary from lender-to-lender and may affect your cash back eligibility. Typical cash back terms include application and settlement dates, the loan minimum and loan types such as principal and interest, owner-occupier and investment loans, as well as the existing lender. For instance, you cannot apply for a cash back offer with the Westpac if you're refinancing an existing Westpac loan of less than $250,000. But, you can apply to refinance a $350,000 Westpac loan to a Commonwealth Bank home loan and be eligible for the cash bank.

Compare Refinance Mortgage Rates

Don't rush into refinancing. Instead, take your time to review the many refinance mortgage rates and offers that are available. The most suitable deal when refinancing is the mortgage that suits your needs. So, before you start researching mortgages, it's essential that you know what type of loan you want, what savings you'll make and the loan terms that suit your circumstances. ? Loan types: The most common refinancing loan types that you'll encounter include fixed and variable rate

mortgages, principal and interest, interest-only, owner-occupier and investment. By knowing which loan type applies to you and your circumstances, you can narrow down your refinancing loan options and find a suitable deal for your situation. ? Savings: Always look for a home loan that gives you a lower rate than the one that you currently have, and make sure you look at fees, as well as the comparison rate so you can factor in loan costs. Refinancing is usually worth it when you opt for a loan that's at least 1% lower your current rate. Also, calculate what savings you'll make by switching loans using a refinancing calculator before you sign a loan application. ? Loan terms: Try to keep your terms manageable. You don't want to agree to a loan term that's more costly if you can spread your term out over 30-years. But you also need to be mindful of the total number of years it will take you to pay off your home. For instance, if you've had a home loan for 10-years and then you look to refinance for 30-years, you'll have your mortgage for 40-years, and this could see you paying hundreds of thousands more in interest. So, if you look to refinance for a 30-year term, then aim to pay more off than the minimum repayment. This approach will enable you to reduce your interest and have control over your repayments.

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WHAT ISII REFINANCING?__

Refinancing occurs when your existing loan gets replaced by a new loan that gives you better terms and conditions. For instance, you might have a loan with lender X, which has an interest rate of 5.0%. However, lender Y can offer you a loan for 3.40%. So, to save yourself more in interest, you switch lenders.

The most common reason for refinancing is lowering the rate of interest paid monthly by finding a loan with a more competitive rate. Other reasons include consolidating or rolling all of your debt into one loan so that it's easier to pay off, or finding a loan with better features such as an offset account or a redraw facility.

Of course, before you switch loans, it's essential that you weigh up the benefits and disadvantages of the loan products to determine if switching is for you.

What is home loan refinancing?

Home loan refinancing happens when you swap your existing home loan for another home loan that provides you with more favourable terms. For example, you might have a home loan with lender X, which has an interest rate of 5.0%. However, lender Y can offer you a $2k cash back refinance loan at 3.40%. The $2,000 cash back will cover the costs of the new loan application, any valuation fees and the annual loan charge. So, you save more right from the start of the new loan.

According to research, hundreds of thousands of home loan holders around Australia refinance their mortgage annually. The Australian Bureau of Statistics reports that over January, February and March 2019, 49,339 owner-occupier loans gained refinancing approval. Based on this figure, on average, some 16,446 home loans were refinanced per month over the three months.

A recent lender (Gateway Bank) survey of borrowers also revealed that some 10% of home loan holders were on the hunt for a better home loan deal. Survey results also indicated that 13% of Australian mortgage holders were considering refinancing over the next 12-months.

How does refinancing work?

If you're not happy with your current loan and you feel that it's putting you under financial stress, then it's time to look at an alternative. While refinancing sounds complicated, the process is relatively straightforward. Here's a step-by-step guide to help you understand precisely how refinancing works.

1. Review your existing loan: Before you look to refinance, you need to consider your current home loan costs. Find out how much interest you're currently paying, the type of loan you have, your loan amount and loan terms, including annual fees. Often you'll find this information on a home loan statement or listed on your account in internet banking.

2. Approach your existing lender: Often, when looking to refinance borrowers forget to talk to their current lender about their options. It's highly unlikely that your lender wants to lose you as a customer, so you may be able to negotiate a better deal and save yourself in switching costs.

Before you look to negotiate, though, know what deals are on offer. Review and compare home loans based on your loan amount and find out what suits you and your needs. Then when you talk to your existing lender, you can inform them about the loan that you're considering, and you can then ask if they can match this deal. If they can't, but give you a counteroffer, then ask if they can print out the loan details for you so that you can compare it to the other loans you're considering.

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3. Review exit fees: Always calculate what your loan exit fees add up to before refinancing. Exit fees include a discharge fee. This charge is usually around $300. However, if you have a fixed rate, then there may be a break fee associated with your existing loan, which can be worth thousands. It's also crucial for you to consider the cost of Lenders Mortgage Insurance (LMI) if you are borrowing more than 80% of your home's value.

4. Research loans: If you haven't already compared loans, then now's the time to get started. Type `refinance home loans' into your favourite search engine and then start looking at what's available. Pay close attention to the advertised and comparison rate, fees, loan features and options. Make a note of the home loans that you think are the best fit for you and your circumstances.

5. Consider costs: Once you've found several loans that you think are suitable, then it's time to work out which could be right for you financially. Calculate how much each loan will cost you, and just how much you'll save long-term by switching. When doing your calculations, make sure that you include all costs for your existing and new loan such as exit and application fees, as well as property valuation fees.

6. Put in a loan application: Once you've found the right home loan for you, then it's time to apply for the loan. To successfully lodge your application, you will need to provide identification, financials and property information. ? Identification includes your driver's license, birth certificate, passport and Medicare card. ? Financials are Australian Taxation Office assessments, payslips and bank statements, and you must supply your lender with the details of your employment, any assets (car, boat, motorbike, other property), any debts (car loan, credit card balances) and estimations of your living costs. ? Property details typically include any loan balance owed, the dwelling type, land size and location.

7. Property valuation: Before your new lender will approve your home loan, they'll want to have your property valued. This approach assures your lender that your home is worth more than they are lending you and that they'll be able to recoup the value of your loan if you default on payment. Property valuations typically cost up to $500 per property.

8. Wait for approval: Once you've put in your application, then you'll have to wait to see if it's approved. Loan approval can take a few days to a few weeks depending on your lender, so be patient.

9. Check settlement: Typically when a refinancing loan settles, your existing loan will be paid out by your new lender and your mortgage title is registered to your new lender. Your old lender will close your account, and your new lender will open an account for you so that you can start making repayments.

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WHAT IS THE POINTII OF REFINANCING__

Depending on your circumstances, there are several reasons why refinancing may benefit you. Some of the most common reasons for refinancing include: ? Lowering rates: Home loan interest rates continually change, so it's essential to review the market to see if your

current home loan rate is competitive. If it's not, then you may be paying far more in interest than you need to, which could cost you thousands over the term of your loan. Let's say you have a 10-year-old home and you owe $300,000 on your mortgage. Your current home loan is variable, and your existing lender has you on a rate of 5.25%. However, you've found a mortgage for 3.44% with another lender. By switching to this mortgage you'll save $60,235 in interest over the remaining 20-years of your loan and you'll recoup the switching costs within five months. ? Manage loan terms: A change in financial or personal circumstances can result in you wanting to change your monthly loan commitment. If this sounds like you, then refinancing could allow you to change your monthly loan repayment. For instance, let's say that you owe $400,000 on your mortgage and you're paying a rate of 4.25% with a 15-year term left on your loan. Based on this, your monthly repayment is $2,899.00. However, you'd like to increase your cash flow, so you refinance your loan term to 25-years at a rate of 3.44%. This move reduces your loan commitment to $2,039.00 per month. ? Finding a better product: If you're not happy with your current loan because it doesn't offer you flexibility (mortgage holiday) or the features (offset and redraw) you want, then refinancing may allow you to find a better product with these advantages. You may have also applied for a low-doc loan due to being self-employed, or a government mortgage because you didn't earn enough to meet standard lending criteria. But you've had this loan for several years, which means you now might be eligible for a traditional loan with lower rates and better terms. ? Improved credit score: When you first applied for your home loan, you had a low credit score, so you had to take a specialised loan to buy your home. Since then you've worked hard to increase your credit score, so the loan that you currently have no longer suits your needs. Consequently, refinancing will allow you to secure a traditional home loan with a lower interest rate. ? Access equity: If you've owned your home for several years, then you may find that the equity in your home has increased substantially. If it has, then you can refinance to potentially release some of this equity to renovate your property and go on an overseas holiday. For example, let's say you bought your home 15 years ago for $350,000. Over this time you've paid off $200,000. Therefore, you owe $150,000 on your home loan. You recently had your home valued, and it's worth $825,000. Based on this, you have $825,000 - $150,000 = $675,000 in equity in your home. You release $200,000 of your home's equity by refinancing to renovate and travel.

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