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When Should You Refinance a Home Loan?

The answer: Whenever it makes financial sense to do so!

In the past, most people who took out a mortgage doggedly continued with it until they had paid it off. These days, people refinance their mortgage much more frequently. The average duration of a home loan in Australia now is just 4-5 years. Here we look at some of the reasons people in Australia refinance their home loan and Astute St Leonards can certainly help you if you choose to refinance.

Mortgage refinancing reason #1: lower rates

The most common reason for people to refinance their mortgage is to get a better deal. But be careful you don’t become interest rate-fixated. When you refinance your home loan, you need to consider fees and charges as well as the interest rate. You often have to pay charges for exiting your current home loan, plus charges for taking out the new mortgage. You need to be sure that in refinancing your home loan that you’ll be better off in the long run after taking into account all costs.

Mortgage refinancing reason #2: more flexibility

Many people only discover the full details about their mortgage when it’s too late. They try to do something and get told by their lender that either they can’t do it, or they will incur a hefty charge if they do. An example is a redraw facility – the ability to pay extra money into a mortgage and then redraw it later. This feature is not possible with a basic home loan, so many people refinance their mortgage to give themselves this sort of increased flexibility.

Mortgage refinancing reason #3: renovations

If you carry out renovations, it often makes sense to refinance your mortgage and take out a construction loan so you only pay interest as building progresses. Once construction is over, it might make sense to refinance your home loan again so that you consolidate the total amount you owe into a loan that minimises your interest bill, while giving you a degree of liquidity.

Mortgage refinancing reason #4: home equity

Over recent years in the property market houses have appreciated at a significant rate. e.g. a home you bought for $300,000 five years ago, might now be worth $500,000. Refinancing your mortgage with a home equity loan might let you tap into that extra $200,000 equity.

Mortgage refinancing reason #5: defaulting

Some people find they have borrowed more than they can comfortably repay, and they’re in danger of defaulting. There’s no shame in that. But don’t suffer in silence. If you’re having trouble making your mortgage repayments, talk to Astute St Leonards about refinancing your home loan to make it more manageable.

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When is the Best Time to Refinance Your Home Loan?

As a home owner with a mortgage, chances are you’ve heard of the term ‘refinance’. A refinance involves reviewing your current home loan, and potentially swapping your loan to another lender who can better meet your current needs, wants and circumstances.

Refinancing can also allow you to consolidate your debts or pay down your mortgage more quickly. At Astute St Leonards, we are currently refinancing property loans in Self Managed Super Funds (SMSF) to increase the value of the super funds. Thus reduces the loan and increases the equity plus more rental income retained.

As described above, another common reason borrowers look to refinance is so that they can access equity – the amount you’d get from selling your home after settling any associated loans, such as a mortgage on that property, and any other costs associated with the property. Depending on that amount, you may be able to access equity in the property without having to sell it, for example, to make home renovations or to buy an investment property.

However, refinancing is not suited to everyone. There are many different factors you will need to consider when thinking about refinancing a loan. Before you initiate an application to refinance, we will need to assess your needs and objectives as well as your current financial situation.

So how will you know that refinancing is the right option for you?

The first step is to speak to a professional, such as a mortgage broker like Astute St Leonards, about your needs and whether you can afford a different loan structure or other change to your mortgage, particularly if you have more than one property.

Are you looking to pay less interest?

Some people are savvy researchers and will want to take advantage of a lower interest rate from another lender should that be available to reduce repayments. If you aim for a lower interest rate, this could potentially save you a lot of money in the long term. One of our SMSF clients saw this as a great way to get a better deal, especially as they are getting close to retirement age and need their fund to have as much cash as possible.

While saving money is often one of the biggest benefits of refinancing, it may not be as straightforward as that and careful consideration is required. At this point, we will need to find out about your existing loan, repayments and current loan structure.

We will also need to find out more about your current financial situation, including your income, any other current debts and about any assets you own. The current value of the property is also taken into consideration, so we will have access to current data that will indicate what your property is estimated to be worth.

We then review the various loan options and figure out whether it’s worth it for you to refinance. Sometimes it’s not worth it if it’s only going to save a couple of hundred dollars a year, particularly when you take into consideration any exit and application fees involved. But if it’s going to save upward of $1,000 a year, refinancing might be a sensible approach. In some cases, we can tell you if getting a lower interest rate from your current lender can be achieved without refinancing.

Do you want to change your loan type?

One of the risks of refinancing your home loan is that you may need to pay Lender’s Mortgage Insurance (LMI) to your new lender. If switching your loan means you will need to pay LMI again, it may not be worth refinancing. This insurance is used to protect the lender from default.

If you do decide to refinance your home loan, working with us rather than going straight to a lender has advantages. We generally have access to loan options from a range of different lenders (up to 36 different lenders) and if there’s a better opportunity for you, we are able to access the new package. It is also important to consider that when you take up a new home loan, it can incur exit fees and may not have all the features your existing home loan has.

Have your circumstances changed?

If you had a recent major life change such as a loss of income or a change in marital status, you might be looking at a refinance of your home loan. If you want to refinance to lower lending costs to help you manage your monthly repayments, speak to us because we can negotiate with your current lender for a rate suitable to your current situation. We can also help you look at alternate options to consolidate your personal loans and credit cards into the one loan. This could help you in lowering your monthly repayments, or help you keep your repayments on time and even save you interest in the long-term.

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Can I renovate a property I own through an SMSF?

This is a current topic as Astute St Leonards is currently refinancing properties in Self Managed Super Funds (SMSF) to reduce the interest rates. If you’re thinking of giving your home – or property owned by the SMSF – a total makeover using your fund, think again. Unfortunately, while you and your fellow trustees have some control over your fund, it doesn’t mean you can spend your money however you like to renovate the property.

The ability to renovate a residential property that you own through an SMSF comes down to how you purchased it. Those who borrowed through their fund to buy the property are restricted in what they can do. Slight improvements and repairs can be made, but a full-blown renovation is saved for those who used the cash in their fund to buy the property.

If you used the cash in your fund to buy a property outright, then you can absolutely do whatever you want, provided your SMSF deed allows you to do so. You can sub-divide, you can develop, you can pretty much do anything.

Those who borrowed through their fund aren’t entirely prohibited on making improvements on their property. Repairs are allowed, but they can’t be vast alterations that change the inherent character of the property. You can certainly make the property more rentable by updating things, but you can’t go and completely gut it and change it. If you really want to do some renovations and you had to borrow, the best way is to go outside your superfund.

Choosing to renovate your property ultimately comes down to increasing its value, but in order to do so, you have to be mindful how you go about it. Everyone wants to be a property developer, right? There’s no use dropping a whole heap of cash in a property where nothing in that street is in the same condition and it’s above the price point. You’ve got to be conscious on what you’re spending money on and what you’re doing.

Whether you’re renovating to repair with borrowed funds or doing a complete makeover with accessible cash, renovating through an SMSF is only worthwhile if it improves the return on your property exponentially. Not playing by the rules or accessing your SMSF prior to retirement for personal gain can result in hefty penalties with fines up to 40% of the fund value. Speaking to a accredited broker like Astute St Leonards, who specialise in property refinancing and who work in partnership with Apexx Wealth, a financial advisor focused on the concepts of an SMSF, can help determine whether it’s beneficial for you to renovate through the fund or to find an alternative.

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How to Refinance a Renovation

This topic came up recently when I was talking to a customer who was looking to refinance their mortgage and defined an outcome of having access to funds for a renovation of the back part of the house. Refinancing your assets to renovate a property is a significant decision that will hopefully improve your standard of living or add substantial value to your property. Refinancing isn’t as straightforward as you might expect – the type of renovation proposed goes a long way to dictating the loan required. If the wrong loan is chosen, you could be left with a pile of unexpected debt.

Know your Budget

The first step when considering how to refinance a renovation is to have a clear idea of your budget. If you underestimate your budget, you run the risk of getting knocked back from your lender. For example, homeowners who have estimated a budget of $100,000 to do renovations, only to discover it will cost a lot more, may have to reapply for the loan, which banks and lenders generally don’t like.

Be conservative with your projection. If you think you need $100,000, Astute St Leonards recommend applying for $150,000 just in case – if you can afford it. The key is stick to your budget which is both hard and critical! The next step is to speak to us to determine which loan will suit your needs and objectives.

Line of Credit Loan (Home Equity Loan)

Also known as an equity loan, to be eligible, a homeowner must be looking to make upgrades to the cosmetic domain of their property. Installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction falls under a line of credit loan.

These renovations, more often than not, do not supersede the costs of structural changes, so homeowners can call on up to 80 per cent of their Loan-to-Value Ratio (LVR). A line of credit loan is a “revolving door” of credit that combines your home loan, daily spending and savings into one loan.

To calculate the value you can borrow, subtract your current loan balance from your property value and then multiply by 80 per cent. For example, if your property is worth $500,000, and you have $250,000 left on your loan, your home equity is $250,000. You then multiply this total by 80 per cent. If you’re uncertain of your home value, contact Astute St Leonards who can assist you in arranging an appraisal or valuation.

If you choose a line of credit home loan, it essentially works as a large credit card. You can use it to purchase cars, cosmetic renovations and other investments. However, the interest-only charge starts when the equity is drawn down. Keep in mind, line of credit loans provide you with money that can gather interest very quickly, so if you are ill disciplined with repayments or money, speak to us to define a plan that matches your unique circumstances.

Construction Loans

Construction loans are suitable for structural work in your home, for example, if you’re adding a new room or making changes to the roof. Construction loans give homeowners the opportunity to access larger sums of money, with the amount dependent upon the expected value of the property after renovations are completed.

The advantage of a construction loan is that the interest is calculated on the outstanding amount, not the maximum amount borrowed. This means you have more money available in your kitty, but only pay interest on the money you choose to spend. For this reason, our broker may recommend that you apply for just one loan, but leave some leeway in your borrowed kitty.

When applying for a construction loan, council approval and a fixed price-building contract are required, so it is important to work with a qualified and licenced construction company or builder. Your lender will appoint an assessor to value your construction at each stage of the renovation. This will happen before you pay your instalment. When construction is complete, speak to us as you may be able to refinance back to the loan of your choice.

When looking at both these loans, consumers can call on other property they own to boost their overall borrowing amount if they wish. Depending on the circumstance, they can use other property to get a line of credit and a construction loan, or they might get a typical construction loan if there is going to be an extensive framework change on the building.

Broker Advice

If you speak to a broker like Astute St Leonards, they will be able to determine which loan will give you the options you seek.  This advice is essential, as a poorly planned construction loan could cost you more down the road. Consumers should ask their broker, “What type of loan am I eligible for?”, because if you don’t get your construction loan right, you may be jeopardising your bank security.

While these specific options can be discussed with your broker, if they aren’t suitable, there may be other options available to you. We can show you how to refinance a renovation.

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Avoid These Refinancing Traps and Mistakes

It is a great time to look at refinancing your mortgages and home loans – with ever lower rates and increasing features being offered in a highly competitive market. The mortgagee is certainly in a powerful position with a market clamouring to be seen. Whether you’re after lower repayments or want to tap into the equity sitting in your home or investment, refinancing can offer a world of benefits. However, here are three refinancing traps and mistakes to be aware of so that you don’t find yourself hooked into a bad deal.

Don’t be fooled by the interest rate

Finding a lower interest rate doesn’t necessarily mean you’ve scored yourself a better deal. In fact, a product with more features may cost you a bit more in fees or interest, but could save you more in the long run. Including features such as an offset account will prove valuable as it will allow you to make larger repayments or put any extra cash against the loan. Products without this feature may charge a fee for early repayments. Worse still, when you come to refinance, you may be hit with huge exit fees because you thought you were being fiscally responsible! Astute St Leonards recently reviewed a refinance opportunity only to find the home owner would be charged $3,000 by their bank to leave, having put a little bit more into the loan each month even without a fixed interest period!

Honeymoon rates are just that

Don’t be lured by offers with discounted introductory rates unless you’ve calculated the savings over the life of the loan. While a loan with a discounted interest rate seems a tempting offer, it’s only temporary. Once the introductory period is over, the interest will revert to a higher standard variable for the rest of the loan term. It may be more beneficial financially to negotiate a lower interest rate without an introductory discount. This is important to consider – with low rates today the savings might add up if you can use an offset account to make a bigger gain.

Be aware of the fees

One of the main purposes of refinancing is to lighten the financial burden, however, that doesn’t mean that it’s not going to cost you. There are many fees involved, which may include discharge and application fees, a valuation fee, land registration fee and possibly mortgage insurance. You may also be subject to stamp duty depending on what state your property is located in. While these cannot be avoided, you have to ensure that the costs involved are not higher than the savings, to make the process worthwhile.

In Summary

While there are traps to avoid, a little expertise can take the stress out of refinancing to save you thousands, fund that renovation, or simply find a loan that suits your life a little better. Talk to Astute St Leonards and we will guide you through the process avoiding the refinancing traps and mistakes that can catch you out. We are here to help!

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Is One Phone Call Really All It Takes To Secure a Lower Interest Rate?

With official interest rates trending downward, shrewd mortgage holders may take the opportunity to call their lender to ask for a better deal. But when even a small interest rate reduction means potential savings of thousands of dollars, is a simple phone call really enough to get you there?

In 2021, ‘your interest rate should have at most a two in front of it’, is common advice for home owners considering the competitiveness of their loan settings. But while a number of lenders offer lower rates to new customers, it’s not always so simple for existing customers to secure the same outcome.

A leading mortgage and finance broker says that if people want a better deal on their mortgage, there are basically two options:

  • Call your bank and ask them to match the new rate, or
  • Contact your broker and vote with your feet.

And although the first option is commonly recommended, lenders aren’t always so obliging when it comes to rate-matching to get you a more affordable mortgage. As an existing client, it can be disheartening to see your bank offer new customers a lower rate to the one you currently have. However, they have provided that money from a pool that came with a rate to match the one the borrower has been given, therefore by providing a lower rate, the lender will be losing money – so they really don’t want to consider that!

Lenders regularly try to ‘win’ new customers by offering low rates. It is a great acquisition strategy, but if they refuse to match your current rate to this new offer, you should contact a broker like Astute St Leonards and refinance with a lender who is hungry to win your business.

Mortgage brokers, on average, have access to a panel of 34 lenders and this creates competition amongst lenders. A broker like Astute St Leonards are also in a position to offer you a more in-depth and customised level of service. This can allow them to find their customers a mortgage product that may suit their current needs, wants and circumstances.

For a confidential discussion, call Stephen on 0412 166 815 and we can help assess your position and the rate that suits.

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Don’t Worry: Are you Concerned about Servicing your Loan?

After a very difficult 2020 where many people lost their jobs, were furloughed or simply had their hours reduced, many home owners have been under increased worry and stress. If you are concerned about servicing your loan, reach out to Astute St Leonards for help.

As Australians everywhere take a close look at their financial circumstances and consider what could happen in 2021, mortgage brokers like Astute St Leonards stand ready to lend a helping hand.

Whether experiencing financial hardship through job loss, a reduction in work hours, or business disruption, an increasing number of Australians may be struggling to balance their books as a result of the Coronavirus, and in many cases are wondering how they will continue to pay the bills.

Difficulty with Repayments

According to research conducted by Finder last year, about one in five mortgage borrowers, or about two million Australian households, were struggling to make repayments, despite record low interest rates. With the challenging circumstances that have emerged since – despite lockdowns and restrictions easing, it is anticipated that these pressures will only increase this year forcing more people to require financial assistance.

Financial Relief Strategies

In this difficult time lenders responded by announcing financial relief strategies to deal with the initial income loss and many have kept these in place as State Governments bounce between lockdown and freedom. In an official Australian Banking Association (ABA) statement, CEO Anna Bligh said, “Banks stand ready to support customers and if anyone is in need of assistance, they shouldn’t wait but come forward as soon as possible”.

Different lenders have different assistance options. These may include waiving fees on early term deposit withdrawals, interest rate freezes on loans, options to defer or restructure home loan repayments and emergency credit card limit increases. Above all, with record low interest rates, a simple refinance may be a great option.

It is important to remember that mortgage brokers have the knowledge, experience and relationships necessary to assist people experiencing or expecting to have trouble paying their home loans as a result of changing circumstances. In times like these, the importance of mortgage brokers in assisting customers with hardship and facilitating access to credit cannot be overstated. For many Australians – particularly those in rural or regional areas – brokers may represent the only source of assistance. 

Expertise of Brokers is of Critical Support

Brokers’ expertise in helping customers navigate the complex home lending market – and their intimate understanding of their customers’ personal circumstances – means they are uniquely positioned to provide critical support for people when discussing hardship and available options with lenders.

If you are concerned about servicing your loan, need further guidance on hardship assistance, or have other questions about your loan arrangements, give Astute St Leonards a call on 02 8912 2139. We are hear to help!

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Everything you Need to Know about Exit Costs when Refinancing

Exit Costs when Refinancing

Here at Astute St Leonards, we have just completed a refinance for a client where we moved two fixed rate loans into a cheaper package. This raised the issues of exit costs and break fees because refinancing can be a great way to save money if you believe you are paying too much for your loan. However, there is more to it than just finding a loan with a lower interest rate and making the change. Before making the switch, ensure the savings you could make outweigh the fees involved. Here are the different exit costs to consider when refinancing:

Exit Fee

Although loans taken out after 1st July 2011 are not subject to deferred establishment, known as “exit” fees, those taken out prior may still be subjected to this fee. Also known as “early termination” or “early discharge” fees, they can sometimes be paid by your new lender but are normally applied to an early contract exit. We will assess whether your loan has exit fees applied or not.

Establishment Fee

Also known as “application“, “up-front” or “set-up” fees, these cover the lender’s cost of preparing the necessary documents for your new home loan. They are payable on most new loans, and the alternative to not paying this particular fee is being charged higher ongoing fees or even a higher rate for the life of the loan.

Mortgage Discharge Fee

Covering your early legal release from all mortgage obligations, this fee is not to be confused with an exit fee. Also known as a “settlement” or “termination” fee, its purpose is to compensate your lender for the revenue it may lose due to the contract break.

Lender’s Mortgage Insurance (LMI)

This non-transferrable premium means that if you hold less than 20 per cent equity at the time of your refinance, you may have to pay LMI even if you paid it on the original loan. Extra care is also needed here because, whether or not you hold 20% of the original valuation of the property, you may not if the property’s value has decreased and while LMI may not have been a consideration at all in the original loan, it may be payable on the refinance.

Stamp Duty

If your purpose for making the switch is to increase your loan amount – maybe to fund renovations – then stamp duty will apply only to the difference between the original loan amount and the refinanced loan amount. Different rules apply in different States, so it’s worth speaking with us to see if this charge applies.

Other Government Charges

Fees are applied for the registration and deregistration of a mortgage so that all claims on a property can be checked by any future buyers. Varying from State to State, these can potentially add up to $1,000 or more, so it is important to review the whole package before making the decision to refinance.

Break Fee

If you were on a fixed rate loan, your lender is likely to charge you a fee for ‘breaking’ out of the loan term. This fee varies depending on the amount owed, the interest rate you were locked into, the current interest rate and the duration of your loan. Each lender will have an algorithm to define this fee and it may not be easily defined without help.

In Summary

Although some of these fees can be negotiated by a broker, the total cost can be substantial. At Astute St Leonards, we can ensure that refinancing will help you achieve your goals while maintaining your capacity to service the debt. We will ensure you are only paying the relevant fees for your unique circumstance.

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Get Your Finance Broker Working for You!

Madison Wells Pty Ltd, trading as Astute St Leonards, has created a series of short videos to highlight how and why to use a finance broker for your home loans, cars loans or even a musical instrument or another asset! This video will show you how to get your finance broker working for you, especially if you are refinancing an expensive loan to a lower rate.

You can watch the other videos in the series here:
5 Great Reasons to use a Finance Broker
What to look for when Choosing a Broker
5 Key Ways a Finance Broker can help you

For more information and a free quote on any loan please give us a call on 02 8912 2139 or contact us through our Astute St Leonards page and you can get your finance broker working for you – i.e. us!

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What to Look for When Choosing a Broker

Astute St Leonards, the finance broking arm of Madison Wells recently published a small series of videos and the second in the series explains what to look for when choosing a broker. There are many many brokers out in the market and not all of them are suitable. Watch this video to see what you should be testing for so that the broker you choose is aligned to your needs, requirements and importantly, ethics.

You can watch the first video in the series here: 5 Great Reasons to Use a Broker.

Astute St Leonards is focused on your needs and requirements. We will always test to see that the loans recommended are suitable for your current stage of life and forward into the future. We are accredited with over 17 different lenders and have a compliance process that provides you with a documented reason as to the choices provided and our recommendation. The ultimate decision is always yours.