Banks are continuing to fight hard for business amidst the current Covid-19 pandemic with many lenders offering the lowest interest rates in Australian history. Further to exceptionally low interest rates, some lenders are offering cashback offers of up to $4,000.00 when those refinance their investment loan or home loan. The Reserve Bank of Australia (RBA) decided earlier this month to hold the cash rate at 0.10% with RBA Governor Philip Lowe stating that the decision was based on the continued economic support requirements during the current recovery phase.
Over the past 12 months we have seen lenders slash both their variable and fixed rate products. Fixed interest rates are currently hovering around the low 2% level with variable rates sub 3%. If your interest rate is not below 3%, it may be worth enquiring about what is possible to ensure your cashflow position is as healthy as it can be.
What does it actually mean to refinance?
Refinancing simply means to switch your home loan from one lender to another. This is commonly done when consumers look to secure a lower interest rate at a new bank or decide to restructure their loan. In Australia, the average term of a home loan at one lender is 4.5 years. Since the maximum typical home loan in total will last for 30 years, refinancing is more common that you may think. We see it as a savvy way to ensure that you have the lowest interest rate possible throughout the entire term of your loan.
What needs to be considered before I choose to refinance my home loan?
The process of refinancing is relatively straight forward however there are some important considerations that need to be understood before an application commences. Like all new finance applications, the lender will want to know if you can service (afford) your loan. Evidencing reliable and steady income is a very important aspect of applying for finance so if you are currently between jobs or unemployed then you may have wait until you can prove a consistent and steady income stream.
Refinancing almost always occurs when the loan to value ratio (LVR) is below 80%. LVR is a ratio between the amount owing on your loan to the value of your property. In the context of lending and refinancing, if the LVR is greater than 80% then you will be required to pay lenders mortgage insurance and this is most often an immediate barrier to refinancing.
How much does it cost to Refinance?
When you are refinancing, it is important to weigh up the savings against any costs of making the move to a new lender. The likely fees to be incurred are:
- Government registration of your new lender against your title – $250.00
- Discharge Fee from your current lender – $250.00 – $350.00
- New Annual Fee at the new lender – $250.00 – $370.00
- Fixed-Rate break fee – This figure is a complex calculation that your current bank determines using the remaining loan balance, remaining fixed term and interest rate differential. This is a figure that is only obtained from the outgoing lender.
How Long does it take to Refinance my Loan?
From start to finish, refinancing a loan can take anywhere from 3-8 weeks. This is all dependent on the lender assessment time as well as the applicant’s efficiency in gathering the necessary documents.
Are there any downsides to refinancing?
Changing lenders means that a you will need to go through a new credit assessment to ensure you are able to service (afford) the new debt. Due to the creation of new accounts with the new bank, you may need or want to notify any employers about the change of account details so you can receive your remuneration in that particular account. On a positive note, if your direct debits are coming out of an existing offset account, this account will remain active at your current bank (as a savings account) when you refinance. This means that you don’t have to worry about missing any direct debit payments while you get things set up at your new lender.
How do I know what lending options are out there?
Refinancing can be a serious financial decision with many variables to consider. If you would like to understand whether this is possible for you then be sure to get in contact with the team at 40 Forty Finance to undergo a home loan health check and gain the valuable information required to make the right decision.