The Reserve Bank’s August 2016 decision to lower the cash rate by 25 basis points to 1.50 per cent is set to benefit mortgage holders; and brokers Australia-wide are noticing a considerable upswing in clients wanting to explore their home loan refinancing options.
With the confidence created by the earlier cash rate cut in May, and the RBA’s decision to again lower the rate based, in part, on diminished risks in the housing market, all signs indicate it’s a great time to enter the property market or review your existing home loan. According to the Australian Bureau of Statistics, around $7.3 billion of established dwelling home loan commitments were refinanced by owner occupiers in May 2016 alone.
With today’s low interest rates playing catalyst to an abundance of competitive deals in the marketplace, home loan refinancing should be a strategy on every mortgage holder’s radar. But with multiple lenders all vying for business, selecting the best deal can be overwhelming. The strong message for borrowers is to compare their options and ensure the structure they have chosen is not only market competitive, but financially viable for the long term.
Picket Fence Finance – Melbourne’s boutique mortgage specialists – understands the benefits the rate cuts hold for mortgage holders. Directors David Kearns and Cameron Stillman weighed in on the key considerations for clients wishing to take advantage of the record low rates through home loan refinancing.
Top Tips for Home Loan Refinancing
Stillman hones in on what the rate cut really means for mortgage holders – more money to be spent on consumable goods; or saving considerable money each month on their home loan. For those wanting to pay down their loan quicker by reducing their minimum monthly repayment and increasing the amount they pay off their loan each month, Stillman says, “It’s a sensible option. Don’t spend the money you save; rather tip it back into your home loan, it’s a great investment strategy.” Kearns concurs, “Many people choose to keep their repayments at the same rate prior to the cut which helps them in terms of getting ahead with their mortgage.”
When asked which key questions clients should be asking when considering home loan refinancing, Kearns recommends, “Am I in a position to save myself money? To reduce my rate? To make additional payments? Am I going to be better off? These are the primary questions to address. Secondly, you need to look at your existing loan, because if you’re on a fixed rate there may be implications by way of break costs. You need to weigh up whether it’s going to be worth refinancing and taking on these costs.”
Kearns encourages mortgage holders to look at the overall viability of making the refinancing move if they’re on a fixed rate. “Speak to your existing bank and ask what your break costs will be. If your break costs are $2,000, for example, and you’re going to save $2,500 in interest rates in the first year, it should become a no brainer.”
Stillman offers a cautionary tip. “There can be some hidden variables to refinancing. Imagine you broke a fixed rate to take a cheaper variable rate, and rates start climbing again. You’ve paid your break cost but in twelve month’s time the variable rate might be back to where your fixed rate was originally. You’ll be losing out and could find yourself behind the eight ball again.”
Presenting a further consideration, Stillman says, “By determining if there’s enough equity in your property to increase your loan – whether through a line of credit or freeing up available funds – you can put it towards anything from a renovation to a future investment.”
The Directors advise it’s very much a case-by-case scenario when it comes to home loan refinancing and encourage everyone to seek advice from an experienced, accredited mortgage broker. They are also strong advocates for regular reviews of clients’ loan structures to ensure they are getting the best deal based on their current financial and personal circumstances.
“Some brokers assess their client’s structure only every one or two years,” says Stillman. “We believe it’s the broker’s responsibility to be keeping an eye out for all our clients. At Picket Fence Finance we are constantly updating our clients about any new deals, and what’s happening in the marketplace. If you only evaluated your structure yearly you may have missed out on several fantastic offers simply because it ‘wasn’t time’ for your annual review.”
Adds Stillman, “Similarly, your circumstances might have changed. You may have commenced with a low doc loan, but twelve months on qualify as a full doc client, potentially saving a lot of money.”