With the recent rises in interest rates and cost of living pressures, many home owners and investors have put more focus on whether their current loans are still suitable or whether it’s worthwhile looking at other options in the wider market. The initial benefits that usually come to mind with refinancing are lower interest rates and fees, with the potential to save many thousands of dollars each year and repay (or offset) your loan much sooner. These are important of course, but there are often other significant aspects that should be taken into account. You may also want to borrow for other opportunities, which could only be possible at certain lenders.
Let’s look at the reasons why you may want to refinance and the considerations that could mean a substantial benefit for you in the long run.
Is your loan still the most suitable option for your circumstances and preferences? When you first took out your loan, consideration would have been given to both your short and long term preferences and goals such as which lenders were best suited to your needs, how much flexibility &/or certainty you wanted, or you may have had tax considerations such as maximising your investment debt or the potential for your home to become an investment property later on. Personal situations often change and it can be worth doing a ‘strategy and health check’ to see if there is a better approach for your loans. This may involve improvements such as offset accounts or redraw functionality, or an opportunity to restructure your loan including revising the loan terms, changing the mix of variable/fixed loans, removing family guarantees, removing ‘cross-securitisation’ if you own multiple properties or extending an interest only period on investment debts.
Lower interest rates and repayments. If borrowers haven't reviewed their loan in recent years, it’s quite likely it will no longer be competitive. Most banks tend to have better offers for new clients, which means existing clients may be on higher rates – often referred to as a ‘loyalty tax’. You may have access to significantly better rates and fees from competitors in the market, along with cashback rebates.
However, it may be an oversight to choose an alternative lender based purely on cashback rebates or the cheapest rate in the market at the time. This can often be due to lenders that offer ‘honeymoon’ rates that rise after a set period, not having products and features (such as a genuine 100% offset account) that suit your long term plans, or have a history of getting clients on board with a product which then quickly becomes uncompetitive. A better outcome may be achieved by selecting a lender with products that suit your overall needs and historically has a positive approach to maintaining highly competitive rates for existing clients over the long term.
Accessing the equity in your home for other purposes. You also might be looking at opportunities to utilise the value in your home for further borrowing now or in the future including:
· Consolidating your higher interest debts such as personal loans. It’s also possible to extend the terms on these debts, however you should be conscious that this may increase the overall interest costs in the long term if you don’t actively make additional voluntary repayments or save extra in an offset account.
· Borrowing for the deposit plus stamp duty and other costs required for an investment property, which can avoid Lenders Mortgage Insurance (LMI).
· Renovations, other investments, helping grow your business or creating a buffer for your financial position.
Your borrowing capacity (and hence your ability to refinance and access further equity) will often vary substantially between banks, which is why it can be important to select a bank who has a favourable credit assessment policy that matches your own requirements.
Getting advice and understanding the pros and cons. In addition to getting guidance on the most suitable loan products and strategy, there are also other aspects to be evaluated as part of the process to ensure it’s worthwhile. These include the fees associated with refinancing, the limitations and potential break fees of fixed rate loans, level of service, or how making multiple applications or refinancing too often can adversely impact your credit score and restrict your future options.
If you or your family & friends are interested in having a chat about these considerations, please feel free to get in touch.
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