How (& Why) to Refinance A Home or Investment Loan

If you’re a homeowner or investor, chances are you have a mortgage one or more of your properties.

And in today’s crazy economic times, it’s likely that you’ve also been keeping a close eye on interest rates as they rise (rapidly).

It’s understandable - because when rates go up, a whole lot more cash flows out of our back pocket, with not much to show for it.

So if interest rates are freaking you out, it might be a good time to look at refinancing.

Put simply, refinancing is either extending your existing loan over a longer period, or moving from your existing loan to another that may offer lower interest rates, better features or terms that offer greater flexibility to suit your needs.

You can refinance with your current lender, or another - the choice is yours.

Apart from the obvious interest rate issue, there are many reasons you might want to refinance, including:

reducing your home loan repayments to free up cash
your property has increased in value, and you want to capitalise on the new-found equity
the fixed rate period on your existing loan is expiring, and the interest rate is set to rise
you can now afford to pay more on your loan, but your terms don’t allow it
you’d like to extend your loan to fund things like an investment property, shares or home renovations
it would be easier to consolidate all your loans into one simple repayment

But in most cases, people refinance to create greater repayment affordability, or gain access to equity to fund a new project.

The best time to refinance.

While timing comes down to personal circumstance, a good indicator that it’s time to refinance is when you spot a new interest rate on the market that sits least 1% lower than the one you’re currently on.

But while this may sound tempting, as with all things, there are costs involved to refinance, so you’ll need to consider whether the move will benefit you in the long run.

Will it save money over the life of the loan, offer better day-to-day cash flow or afford you greater flexibility to do the things you want to do?

If the answer to any of these are yes - and they’re important to you - then refinancing could be a great option.

What’s involved in refinancing?

The first step, as with any loan, is to prove you can repay it.

While you’re already servicing an existing loan, any new lender will make you jump through the same hoops as if you were a new customer.

They’ll want to know why you want to refinance, how well you’ve serviced your existing loan (have you kept up with repayments?) and also whether or not you’re able to afford their new repayments.

They’ll also want to know what value or equity you have in your property, and how much of a cash deposit you have.

Next, you need to carefully assess all your options.

Just like trying on sunglasses, there are hundreds of different options to choose from - you just need to find the one that suits you best!

The good news is, there’s a loan for just about everything - basic home loans, owner occupier loans, investment home loans, standard variable loans, fixed loans and construction loans… the list goes on.

Talking to your lender or mortgage broker will help narrow down the type you need.

They’ll also discuss the life of the loan - how long you’d like to extend your existing loan, or how long your new one needs to be.

Once you’ve settled on the type of loan you need, and it’s length, it’s time to compare features.

Easier said than done, they can include:

✔ Introductory or honeymoon rates

✔ Cashbacks or rebates

✔ Variable or fixed interest rate terms, including split loans

✔ Comparison rates

✔ Break costs

✔ Offset accounts, redraw facilities and repayment holiday terms

✔ Service fees & charges - including discharge, valuation and transaction fees, plus credit cards and insurance

Who can you trust?

The final step when refinancing your home loan is to choose which lender to go with.

This could be an obvious choice after working through all your options.

But if you’ve found several comparable loans from different lenders, choosing which one to trust with your loan can be difficult - and let’s face it, it’s a huge decision that can impact your finances for years to come!

So how do you short-list? Do your homework!

Speak to each lender directly to find out what they offer, or use free loan comparison sites online to easily compare the features that matter to you.

While it can be time-consuming dealing one-on-one with each lender, or sifting through all the finer details, you’ll be getting the most accurate information and you may even come across lenders you’d not considered before.

But if you’re pressed for time, or feeling overwhelmed?

Why not have a professional mortgage broker do the legwork for you!

Mortgage brokers are well-experienced in finding and securing the best loans for their customers.

They understand the technical jargon that goes hand-in-hand with most financial products, stay abreast of all the best offers available, and know the best ways to help you apply successfully.

Just make sure to choose someone reputable.

Brokers are generally paid on lender commissions, so make sure to look at reviews, speak to references and take your time finding someone that will have your best interests at heart, regardless of kickbacks.

Here are some local South Australian legends that we’ve come to know, trust and confidently recommend to our own We Connect Property clients:

Annette Tothill Finance | 0420 973 551 | tothillfinance.com.au
Nectar Mortgages | 0430 110 304 | nectarmortgages.com.au/dustinmcmahon
NJK Finance | 0483 009 076 | njkfinance.com.au
AAA Mortgage Solutions | 1300 555 888 | aaamortgagesolutions.com.au
ANZ Mobile Lender, Cameron Walker | 0410 544 833 | mobilelending.anz.com/profiles/cameron_walker

If you’ve put off taking a careful look at your home loan, it could be time to reassess and consider refinancing.

With the financial landscape shifting rapidly in today’s fast-paced market, you could be shelling out more cash than necessary, and missing out on an alternative that’s a better fit for you and your lifestyle.

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There’s seems to be a huge amount of jargon in the finance industry, so to help, here’s a list of some of the most common home loan terms - and what they mean:

Loan Term

This refers to the ‘lifetime’ of your loan. Or, rather, the amount of time it takes to pay off your loan.

For owner-occupier home loans, the norm is around 20 - 30 years, while investors might look at shorter periods.

As a rule of thumb, the longer the loan, the lower the repayments. However, a lengthier loan can sometimes mean more overall interest, so do your homework.

Principal

The ‘principal’ is simply the total amount of money you’ve borrowed from your lender.

Interest rate

This refers to the annual amount (as a percentage) you’ll be charged in addition to paying back your principal.

It’s essentially the amount a lender charges you - on top of the loan amount - for the privilege of borrowing their money.

Cashbacks / Rebates

In a competitive loan market, lenders often offer cash refunds or balance reductions to entice you to choose them.

These can sometimes be a great deal, but don’t get sucked in by the bright lights - make sure you compare the interest rates, comparison rates and fees to make sure you’re better off overall.

Variable & Fixed Interest Rates

‘Variable rate’ home loans mean that the interest you repay can fluctuate depending on market conditions - influenced most often by the Reserve Bank of Australia (RBA) changing the official cash rate. When interest rates change, your repayment amount changes too.

Conversely, a ‘fixed rate home loan’ means the amount of interest on your repayments won’t change for however long you’ve agreed with your lender - usually a set amount of time (ie. 1 - 5 years)

Comparison Rates

Comparison rates make it easier for you to compare loans from different lenders, and calculate how much you’re likely to pay over the lifetime of each loan.

They take into account all the ‘hidden’ fees and charges that can affect the overall cost of a loan, minus government charges and early pay-out fees.

Break Costs

Often fixed rate home loans come with a caveat that you can’t pay them out before their term is up.

If circumstances change and you’d like to pay them off early, you’ll likely be charged a ‘break cost’ or ‘exit fee’ to do so - much like cancelling a mobile phone plan early.

Repayments

Repayments refer to the amount of cash you fork out weekly, fortnightly or monthly to repay your loan.

Usually comprising both principal and interest portions to help chip away at your overall loan amount, interest-only repayments can be negotiated under certain circumstances.

Under variable loan conditions, repayments can vary, while under fixed terms, your repayments will stay the same for a set amount of time.

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And if you’d like some expert guidance and support? We’re ready and waiting to answer all your questions!

If you’re just getting started, or looking for more valuable property buying, selling or investing tips, tricks and hints, check out these other handy articles on our blog:

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DISCLAIMER: All recommendations made by We Connect Property are general in nature and not to be relied upon as legal or financial advice. To ensure accuracy, we always strongly recommend seeking independent, professional advice tailored to your specific situation before making any investment or financial decisions.