Over the past few months, I have been closely watching bank interest rates and I am beginning to feel that right now could be the perfect time to refinance your home loan.
Below are five clear reasons why right now could be the time that in the years to come you wished you took action and locked your mortgage away for many years.
- Bank policy changes
On 9 December 2014, APRA released this update stating that they are carefully looking at bank lending practices and in particular around investment loans. The ABC wrote a good report on it as well and there are many others if you search APRA bank changes.
The wash of it all is that banks have been using the above to re-evaluate their policies and practices to ensure they are protecting themselves. The bottom line is that banks care about the bottom line. They always want to make a profit and the bigger is always better. I shouldn't be so hard on the banks, but when did you get a call from them to let them know you could save another 0.4% on your home loan or that the insurance you have is actually very expensive.
So what have the banks done?
As expected they have begun to lower the interest rate discounts they offer to investors and secondly back this up by making it much more difficult to borrow.
The higher rates mean more profits for their shareholders and by restricting investor loans they end up being able to lend more too owner occupied borrowers which are lower risk. A win win for the banks.
So why does this all matter?
If banks are beginning to tighten their policy, that means the terms you are getting today will likely be better than the terms you can get tomorrow.
Just this week, Westpac banned investment lending over 80%, a big jump away and a "we don't want your business" to investors. As i tell my clients, nobody and I mean nobody knows what will happen in the future. But what we can do however is look at the signs and the signs are saying borrowing in the future is looking harder than today.
- Lock in equity
I think everyone in Australia, maybe the world, know that Sydney house prices have risen significantly over the past 3 years. CoreLogic, arguably Australia’s leading property data specialists released an amazing report comparing the last boom to the current one. Just like there were in 2004; people are predicting crashes and bubbles popping. The problem most commentators miss is that the property market does not work like the stock market. When things go wrong in the stock market, very few companies survive. Panic selling hits and no matter how great the company is, people sell and people sell FAST.
This mass selling causes markets to take on big falls in very short time periods. A week is a long time and great companies get absolutely smashed. In a downturn in the property market, big falls can be seen but it would not happen on mass and across every property if it did. Good properties (low supply, extremely high demand) may lose a little heat but they won’t fall the same as an off the plan apartment in Rosebery or a house and land package in the outskirts of Sydney.
So without going down this discussion in detail, it’s clear to say that Sydney has had a great run, it may even have another 12-24 months of growth but there will be a point where things cool off. Growth will slow and there will be some stability in prices to allow incomes to catch up to the new level of affordability.
If you are reading this and own a home in Sydney, this growth is very powerful to lock in. For example, if you purchased a place for $800,000 a few years ago and it’s now worth $1,300,000. You could potentially refinance up to 80% on the value of $1,300,000 ($1,040,000)
In this example you may have borrowed $640,000 initially and you now have the ability to borrow another $400,000 for future investment up to $1,040,000.
So what do you do with that?
Option 1 - Nothing
When you borrow this $400,000, the $400,000 would be released and paid in to an offset account. This $400,000 would sit in an offset account next to the $400,000 loan for as long as you want.
As they are offsetting each other you do not pay a penny of interest until you spend some of the $400,000. If you never did, you would never pay a cent of interest.
While you may not want to do anything with it now, you may want to invest in the future. You may have renovations that come up or finally be thrown a curve ball like losing your job or unfortunately be hit with illness.
But what if you had the $400,000 sitting there ready to go, you would be protected as you have a buffer. If the stock market were to fall 30% and you wanted to invest, you have the money ready to go. If you wanted to spend $20,000 on fixing the roof, you have the money ready to go. If you lost your job, you have money there to protect you and access to a loan you may no longer have been able to get approved.
Option 2- Invest
While investing in the property market right now needs to be completed with an extreme amount of care there are still opportunities. Some would rightly argue that the Sydney market is flying into space on some occasions and apartments will consistently wash the suburbs of all capital cities for the next 500 years.
There are however markets around the country that have great growth prospects as Australia keeps on growing and stays as a very desirable place to live in the world. Some areas have had a little bit of growth but not on the level that could be considered silly or overvalued on many accounts.
On another note; the stock markets of the world are extremely volatile right now. Volatility includes both rises in prices and falls. Right now it’s also not a bad time to begin to build up investment portfolio as the volatility is giving an opportunity to buy at lower prices than in the months before. Sure i wouldn't be putting everything on black, but sometimes buying a little bit in times when markets are volatile will be a good decision.
But what if today was not the right time to invest but in December it was. If the stock market did fall you may decide to top up your longer term portfolio while prices are cheaper and there is a sale on.
Please note, I am not suggesting you invest as that is an extremely personal and individual decision but there are still opportunities to invest if it suits your longer term strategic plan. The most important part is to actually have one.
- Bank Discounts
At the moment bank discounts are at ridiculously high level compared to longer term averages. Loan discounts today are regularly 1.3% and above. Something we could only dream about a few years ago.
By refinancing a home loan that you setup just a few years ago, you will likely save 0.2-0.6% on your current rate. This will save you many $1,000s over the coming years and the most important factor is that this discount is locked in for the life of the loan – not some introductory rate but locked in for the next 30 years.
If banks, went back to the discounts of a few years ago, as you can see in the GFC, the rate you may be offered in 12 months time may be 0.3-1% less than what you can get today. On large loans this would be a huge saving and something you will never want to lose.
- Rising Fixed Rates
In the past few weeks, long term fixed rates on 5 years loans have begun to rise.In some cases, such as St George the five year fixed rate is 4.59% and it was 4.49%. There are many other examples, but basically there is a 0.1-0.2% rise in these rates which is equivalent to around 0.5-1% over five years. A small rise over five years means a big rise in the total cost of interest. 1% on $1mil is $10,000.
If you are planning on staying in your home for five years, now could be the time to fix.
- Resetting up your banking
While refinancing is a relatively easy process as you can read here, I do believe it gives you an opportunity to reset the way you do your banking and set a better budgeting process in place.
If you are finding money is going all over the place and you are have no system, refinancing your loan may be what you need to start fresh and setup a way of managing your money to last you forever.
So in summary, as you can see there are number of things to consider and whyright now might be the best time to refinance.
The negatives however is that I am wrong and rates get cheaper and you could get a better rate in the future. While that is certainly possible there are number of other warnings that are showing that this may not be the case.