Have you spoken to your mortgage broker lately? Has your broker made an assessment of your financial situation and reviewed your home loan? Did your broker recommend a new loan structure and for you to refinance your current mortgage to another lender to enable you to achieve your financial goals?
With the cash rate increasing from .10% last May to 1.85% this August 2022, you may be noticing your mortgage repayment slowly going up. After consulting with your broker, you’ve made a decision that refinancing will help ease the pressure of the rising cost of living and petrol.
Refinancing your home loan can be a great way to save on your mortgage repayment. A lower rate can mean a lighter load on your monthly budget. Plus, home loan products may have changed since you first committed, so you might find a product with features that better suit you. Or your financial situation may have changed since you first took out your home loan.
Here are a few tips to help you with the refinancing process.
Know why you want to refinance your home loan
Make sure you’re really clear about your motivation for refinancing your home loan. Many homeowners use refinancing to fund renovations or the purchase of a new car. If you have a few credit card debts that you want to consolidate into your home loan, refinancing means a lower repayment because your home loan rate is lower than the interest rate on your credit card. Whatever the reason, your broker will be keen to discuss whether refinancing your home loan is the best strategy for your needs.
Understand loan products, loan features, loan repayment and loan term
Nowadays, there are all sorts of loan features and tools to help you save interest and get ahead. Two popular choices are a redraw facility and an offset account.
With a redraw facility, you can make extra repayments on your mortgage and save on interest, but still, access funds should you need them.
An offset account allows you to deposit money into a transaction account that’s linked to your mortgage. Deposited funds are offset against your loan balance, reducing your interest.
If you’re looking at unlocking the equity in your home for a future investment purchase, an interest only loan repayment will work better for you. You don’t have to pay interest on the unused portion of the cash out.
If you’re consolidating a few credit card and personal loan debts, then a shorter loan term i.e. 5 years will work best for you. You don’t want to consolidate these debts and pay them off in 30 years and end up paying more interest. That’s not putting you in a better financial position.
Check your credit score
One of the things lenders look into when assessing your ability to repay a loan is your credit report. Your credit report may also include a credit score. This is a numerical value that represents your creditworthiness and how reliable you are as a borrower. The higher the score, the more banks you can choose from, and the better your chances of getting your refinancing loan approved.
Get your home ready for valuation
Your broker will order a valuation prior to submitting the loan application. The bank will want to see that you at least have a 20% equity in your home so that you avoid paying loan mortgage insurance. The better the valuation, the more flexibility you’ll likely have when it comes to your loan. Because the price of homes have gone up in the last 2 years during the pandemic, it is possible that you have built a 20% equity in your home or even more. If this is the case, then you can ask the new bank for a more competitive interest rate.
Find out the lender’s minimum requirements
Aside from having an acceptable credit score, other requirements include a debt-to-income ratio or DTI between 6 and 7. DTI is a measure that’s used by lenders when you apply for a home loan. It refers to how much total debt you have divided by your annual gross income.
Lenders also want to see that your home loan statements are in order. If you are consolidating a few credit card debts, then you need to provide at least 3 months’ statements with no late payments or balances exceeding the credit limit.
Calculate the exact amount you need
If you’re considering a cash-out, you likely need the funds for a specific purpose. Let’s say, you plan to use the cash out to consolidate a few debts, then gather your personal loan and credit card statements, and add up what you owe. If the cash out is to be used for renovations, consult with a few contractors to get estimates for both labor and materials ahead of time.
Take the opportunity to explore new options
Banks right now are offering cash backs ranging from $2,000 to $5,000 to attract new customers and to cover the costs involved when refinancing your home loan. Refinancing is an opportunity for you to take stock of your current loan, to see what’s available with other lenders and to weigh up different types of loans and their features. Circumstances change over time and the loan you took out when you purchased your home years ago may no longer be the best fit for you today. To find out if refinancing is right for you, organise a one on one complimentary consultation with a Maverick Finance broker.
Maria Papa is a senior property and finance expert specialising in home loans, investment loans, self-employed loans, alt doc loans, car loans, personal loans, and loan protection. She has offices in Sydney, Melbourne, and Manila. If you have questions, you can call Maria at 0430 144 008 or email her at mpapa@maverickfinance.com.au.
Your full financial situation will need to be reviewed prior to acceptance of any offer or product.