As humans we are creatures of habit and unless something is broken, we tend to avoid paying attention to it. When it comes to your home loan, complacency can be costly. Your bank or lender usually forgets about you once your home loan has settled. The only time they’ll contact you, apart from marketing, is when they learn you’re about to refinance elsewhere – usually their reactive action is too late as your new lender has a much more compelling offer.
Refinancing is a term often misunderstood. Whilst refinancing is a necessity when it comes to releasing equity, or when it comes to buying another property, refinancing has another purpose often neglected – i.e. saving money and changing loan structure to accommodate your ongoing needs.
As a mortgage broking business, we conduct annual reviews for our clients (as part of our After Care) to ensure that a home loan is not collecting dust. From experience, a home loan usually passes it’s use-by-date after several years, with the main reason being that the home loan is outdated and no longer competitive, and/or a clients’ lifestyle choices and investment choices have changed, in which case this necessitates a refinance.
Some home loan customers may think that remaining with the same lender for many years gives them a loyalty advantage and results in a loyalty discount. This could not be further from the truth. Remaining with the same lender for a long period of time usually results in paying a loyalty tax – quite the opposite..!!
The purpose of this blog is not to bash banks or lenders, but to point out the importance of competition and choice. Before banking deregulation in the 1980’s, home loans were primarily offered by the major banks. This was one reason why home loan rates got as high as 17% (as at June 1989). Once competition was introduced from the deregulation and then from the introduction of mortgage brokers, home loan rates were in free fall – and have done so ever since.
Right now we’re in the eye of a health crisis and therefore many home loan customers are asking whether now is a good time to refinance or whether it’s more suitable to stay with their current lender until the pandemic passes.
To clear any misconceptions, here are 7 reasons why I think a home loan health check is smart particularly during COVID-19, and particularly if your home loan has been in existence for several years:
- You’re likely to get a lower home loan rate
The official cash rate right now is at the lowest in history at 0.25%, but it’s not always a level playing field across lenders. Further, some banks are offering thousands in cash rebates (at time of writing) to win your business
- Access to a more suitable home loan
Life is always changing, so it’s important to ensure your home loan is still working for you. A key consideration when refinancing is to choose a home loan to suit your changing lifestyle needs, as well as to achieve certainty particularly when there is a crisis – like now
- Wipe years off your home loan
Refinancing and restructuring debt gives you the opportunity to lock in additional repayments which you have made to date. Given that home loan rates have been reducing for several years, it’s very likely you are ahead on your repayments and locking these (extra repayments) in will reduce your loan repayments and/or help you wipe years off your (remaining) home loan term
- Leverage your equity position
A sound wealth creation strategy (option) may be to leverage the equity against your home or investment property by borrowing against it. This is also the case if you’ve been contemplating renovating your home and/or investment property
- Improve your cash flow and load up your financial buffer
In uncertain times, having a healthy financial buffer is very important. You may qualify for equity release today, but who knows what the rules will be tomorrow? My recommendation is to maintain a safe financial buffer for life’s uncertainties
- Reduce your home loan repayments
Refinancing re-sets the loan term which results in reduced home loan repayments. This may be a sound strategy if cash flow is an issue for you right now
- Consolidate unsecured debts
Personal loans, car loans, and any type of unsecured loan usually comes with a higher interest rate and a shorter loan term. Consolidating such loans usually results in significantly lower repayments and savings in loan interest. This may be a sound strategy if cash flow is an issue for you right now
Of course to qualify for a refinance, you need to demonstrate job security and income, as well as the ability to meet the lenders’ qualifying criteria. If you’re not sure, just ask by sending us an enquiry.
It should be noted that home loans are an essential service and therefore COVID-19 restrictions don’t apply – for us it’s business as usual as we are still very active in assisting clients with refinancing during these uncertain times.
I hope today’s topic provides you with further insight into the topic of refinancing and why it’s important to review your home and/or investment loans at least once a year – a complimentary service we offer our clients as part of our After Care program.
Disclaimer: The Information is general in nature and does not take into account your particular investment objectives or financial situation. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the information without first seeking expert financial advice. Your full financial needs and requirements would need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.