Are You Considering Refinancing Your Mortgage?
Is your home loan not up to scratch? Are you looking for a better rate? Do you want to unlock equity? Then refinancing could be for you, but there are some important questions to ask first.
Refinancing may offer you opportunities to unlock equity, land a better rate and avoid what is known as “loyalty tax.” Sticking to the same loan could see you missing out on favourable rates and features that lenders like to use to use to gain new customers. Or maybe you are about to come off a fixed loan period and are bracing for a potential rate hike.
Whatever the reasons for refinancing, we have some questions you help you through the process.
What Is Your Financial Picture?
Banks want to look at your financial profile before lending you money, so check that your credit score is healthy to avoid disappointment.
Look at your budget to see how much you can afford to pay towards a mortgage. Include interest, repayments, and service fees, and factor in possible additional refinancing costs such as application and valuation fees. You can also consider how the length of your loan impacts you budget.
A longer-term loan usually comes with lower repayments but more interest over the lifetime of your loan. A shorter-term loan on the other hand would usually mean you make higher repayments now, but you could save on total interest payments.
Whichever way are you are leaning, we can help you crunch the numbers.
Do You Have Equity?
Having 20% equity in your home is typically a lender requirement when refinancing. But what is equity?
It is the difference between the market value of your property and the balance of your mortgage. With the recent decline in property values, it is an important thing to check.
The 20% equity typically acts as a deposit. Not having 20% may mean you have to pay lenders’ mortgage insurance, which may make refinancing not worth it. And negative equity, when your mortgage balance exceeds your property’s value, would most likely put the brakes on any refinancing plans. But if you have additional equity, you may be able to unlock it when refinancing.
Here is an example. Say your house is now worth $1 million, but you bought it for $800,000 a few years back with a $600,000 loan that you have paid down to $500,000. Banks will typically allow a loan for 80% of a property’s market value (depending on your financial position and other factors). So, if you refinanced your $500,000 loan to an $800,000 loan, you could unlock $300,000 for things like renovation projects or investments.
What Are You Looking For?
Now it is time to think about what you want from a loan.
A better interest rate is usually at the top of the list, but what other features could benefit you? An offset account may be something you want to reduce interest, or the ability to make additional repayments without incurring penalties.
Depending on what you are after, you may not need to move to another lender. We can always talk to your current lender first to see if they will offer something better. If not, then we can explore other options.
Frequently Asked Questions
Why is refinancing a popular option?
Refinancing has gained popularity due to the rising cost of living and fluctuating interest rates. According to ABS data, refinancing values reached a record high of $13.4 billion in November 2022.
What is “loyalty tax” and how can refinancing help avoid it?
Loyalty tax refers to the disadvantage you may face by sticking to the same loan for an extended period. By refinancing, you can take advantage of better rates and features that lenders offer to attract new customers.
What factors should I consider before refinancing?
Before refinancing, you should check your credit score and budget to see how much you can afford in mortgage repayments. Also, consider any additional costs like application and valuation fees.
How does equity play a role in refinancing?
Having at least 20% equity in your home is typically a lender requirement for refinancing. Equity is the difference between the market value of your property and the balance of your mortgage.
What loan features should I look for when refinancing?
Apart from a better interest rate, you may also want features like an offset account or the ability to make additional repayments without penalties.
Can I negotiate with my current lender before switching?
Yes, it’s always a good idea to talk to your current lender to see if they can offer a better deal before deciding to switch to another lender.
Get in touch
Do you want to refinance to unlock a better interest rate, features and benefits or equity in your home? Then give us a call. We can help assess your situation to see what is possible and locate loans and lenders that would be a great fit for you.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.