Better the (mortgage) devil you know?
At some point in their mortgage lives almost every strata investor debates whether to refinance their current home loan or stick to their existing one.
Up until recently banks offered generous refinancing options, allowing competitive financing options to those willing to put in the leg work.
However tight economic conditions paired with much stricter borrowing criteria and the tightening of regulations as a result of the banking commission, means it is now much tougher for strata mortgage holders to secure a better deal.
But if the big four banks are to be believed, there are still options to be found where Australian borrowers can access new loans with a lower rate and more suitable features.
MoneySmart, the Australian Securities & Investments Commission (ASIC)’s financial advice arm, says there are numerous factors to consider before switching your home loan.
The first is to ask your current lender for a better deal as they may reduce the interest rate on your current loan if they think you are planning to switch to a cheaper loan offered by a competitor.
You will have much more ammunition if you have at least 20% equity in your home while having a good credit score should also assist with negotiations.
MoneySmart says some lenders will only refinance with a new 25 or 30-year loan term and the length of the new loan being offered may not suit your individual circumstances. For this reason, it is also worthwhile ensuring it is not longer than the years you have left to pay off your current mortgage as the longer you have a loan, the more you’ll pay in interest.
Likewise, refinancing can also throw up a few hurdles if you have less than 20% equity in your home. Most lenders giving money to homeowners with 19% or less equity in their homes require you pay what is known as lender’s mortgage insurance which can run to tens of thousands of dollars and significantly outweigh the savings you’ll get from a lower interest rate.
If you decide to switch, it is worthwhile requesting a refund of some of the mortgage insurance from your current loan.
Perform a health check once every 12 months to evaluate if your current mortgage is meeting your personal and financial needs.
According to MoneyWise, it is advisable to get at least two different quotes on home loans for your unique situation. This is where mortgage brokers or a comparison website can help as a fast way to finding out what’s available.
When it comes to fees and charges, each lender is different so you should have a number of items to confirm, namely:
- Fixed rate loan – if you’re on a fixed rate loan, you may need to pay a break fee
- Discharge (sometimes called a termination) fee – a fee when you close your current loan
- Application fee – upfront fee when you apply for a new loan
- Switching fee – a fee for refinancing internally (staying with your current lender but switching to a different loan)
- Stamp duty – you may be liable for stamp duty when you refinance. Check with your lender.
They may not agree to your request but is always worth asking your prospective new lender to waive the application fee to secure your business.
While there is no limit to the number of times you can refinance your mortgage, comparison group Finder suggests there a number of life stages that most mortgage holders go through that make refinancing an attractive option.
- First home buyers – usually a low and fixed rate with no features so they can focus on paying back the loan
- Young professional or family – a variable interest rate with a range of features to pay off their loan sooner
- Middle aged professional – a variable rate or line of credit with a range of features to tap into their equity for more investments
- Preparing for retirement – a line of credit loan to tap into equity to make larger investments than the previous life stage
- 55-plus or retired – line of credit or reverse mortgage
Other experts suggest that strata mortgage holders perform a health check once every 12 months to evaluate if your current mortgage is meeting your personal and financial needs.