Refinancing your home loan- Is it really worth it?

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The start of 2015 has started with a flurry of clients deciding enough is enough and leaving their current bank for a better home loan. Some have left smaller lenders while other have left the big four due to some very sharp promotions recently offered by ING and Suncorp. These deals ended up saving clients around 0.5-1% each in interest every year and in some cases no annual fees. They also had access to all-time low five year fixed rates at 4.4%. Unbelievable. To keep it simple, on a $1,000,000 loan, this saving is equivalent to around $5,000-10,000 a year. Over the next 30 years a saving of $5,000 a year compounds to a whopping $350,000. A nice sum to spend in your retirement.

If the loan was against their principal place of residence (PPOR), it would be even better. Interest on your PPOR is not tax deductible and paid from after tax earnings. A $5,000 savings would actually be equivalent to getting an $8,000-10,000 a year pay rise. Better than a slap in the face with a wet fish.

One of the most important parts (if not the most important part) of managing your finances is be in control of what comes in and what goes out every month. With the life we live today; it can difficult for most families to save more.

But what if didn’t save more but focused on this very simple equation.

Option 1) Earn More

Option 2) Spend Less

Earning more can be difficult and is sometimes out of your control. Spending less however is definitely something you can control.

If the goal was to spend less, where should we start? Do I try to remove my morning coffee or do I attack my biggest expenses first -the mortgage repayment.

Unfortunately, I find that not many home-owners know what their interest rate is and how competitive it is. I also find that there is a general misconception from home-owners regarding the amount of work and costs involved to refinance their home loan to another lender. While refinancing a loan is not as simple as 1-2-3, if done with the help of a mortgage broker it is much easier and simpler.

It is not however all profit and no work. There will be some initial boring administration work to deal with and around 1-2 months from start to finish of waiting. The process (if done correctly) however is not only financially rewarding, it can also be a great opportunity to reset up your banking the right way.

Personally I believe that as a borrower, you now have to be always fighting for the best possible rate.

We are all constantly reminded of the millions, I mean billions of dollars our banks make each year. They are envy of the world. We are also still waiting for the friendly phone call to let us know that they have decided to reduce your rate by 0.5% and to share some of those bumper profits.

Unfortunately loyalty between banks and customers no longer exists. Customers are force to shop the market to make sure they have the best possible rate and forced to do so every year.

As you can see below, over the past three years the discount banks are offering have significantly risen.

DiscountRangeMar2015

Three years ago, the maximum discount offered on loans was around 1%.

Today, those same loans are getting a discount starting at 1.3% and as high as 1.4%. This may be an extra 0.3-0.8% depending on what was initially negotiated.

Therefore if your loan was setup longer than 12 months ago, it is highly likely you will get a better rate at another lender. That lower rate may not sound like a big difference, but it may save you many $1,000s a year.

It’s important to focus financially on small savings because over long periods they make big differences due to compound interest.

What are the benefits?

1)   Savings – The first and most likely largest benefit is a saving of interest.

2)   Compounding – These savings then compound each year and get bigger and bigger.

3)   Further Invest – If the property has equity available. You may be able to refinance up to 80% on the new valuation. You may choose to use this to cover the deposit on a new investment property or to build an investment share portfolio.

4)   Renovation – The refinance may release equity to fund a renovation or maintenance on the property.

5)   Consolidate Debts – If you have additional personal loans or credit cards, you may choose to refinance in to one new loan and also save interest.

6)   Fixed Rates – Some banks have amazing fixed rate deals from time to time that are too good to miss. ME Bank amongst others are known for this.

What is the work involved? Is it worth it?

1)   Find out and decide on the best deal for you 30 MINS -  Generally speaking, a mortgage broker should be broadly aware of the best deals on the market at present. If however the situation, is left field, they may need to do some additional research and come back to you on the best deal for you. I have many clients being in a state of disbelief and disappointed at this point in time. Firstly, they know they could have done it years ago and secondly, their bank has never said anything. Personally, this realization is enough motivation to move lenders on the principal of the matter and secondly to build a stronger fresh relationship with a new lender. It does however sometimes not make sense. Like anything, you will have the opportunity to weigh up all the facts and figures to see if it is a worthwhile decision for you.

2)   Get application documents ready- 30 MINS - The documents are usually minimal unless you have a complex situation. Generally the new bank will want to see

  1. Latest Payslips for salaried workers
  2. Rates notice for properties
  3. Passport and Drivers Licence
  4. Last six months of current home loan statement

3)   Compliance Documents – 15 MINS - Once the broker is happy all is in order and ready to go, they will prepare the compliance documentation and bank application for you. Once you have reviewed and signed they will lodge the loan with the new lender.

4)   Unconditional Approval –10 MINS - Depending on how busy the lender is; approval will usually be received in 48-72 hours after lodging the application. Unless there are complications along the way, the banks team will have assessed whether you are a great new customer and if they are happy, you will get unconditional approval.

5)   Sign Loan Documents- 30 MINS - The loan documents will be sent to the mortgage broker and they will arrange a time with you to sign new loan documents. Some banks make this more difficult than others but once done, they are returned and you can sit back and relax.

6)   Discharge and Setup – 10 MINS - This period is really a sit and wait. It can drag out as one lender is fundamentally letting the other know that their customer is leaving the bank. The lender usually decides to delay this as long as possible to get even more interest. Usually 2 to 4 weeks later they agree to a time and date. On this date (which you will know about before) one loan will close at Lender A and the new loan at Lender B will open.

7)   New Banking- 30 MINS - The day following, the broker will generally have a personal banker at the new bank call you and start a relationship with you. They are now your source to call for any problems and can setup all your new accounts. They will also ensure your internet banking is working as it should and offer you any additional services that may suit.

8)   Old Banking- 1 HOUR- Some clients prefer to keep their old banking as it is and transfer a set amount to the new lender offset account. I actually think this is a great strategy on occasion as clients should be focused on saving as much as they can in to an offset account and not worrying about the minimum repayment. Others take the opportunity to setup all new direct debits from an offset account or credit card and change their income to the new account.

In summary, I suggest over a 4-6 week period it may take around 4-6 hours including a buffer. Not a huge amount of “work”

What is the cost?

Lenders Mortgage Insurance

1)   If you have never paid it, do not worry. But if you have paid it, please be careful that you do not have to pay it again at the new lender. In doing so, you may lose your current protection. If you have loan is less than 70% of the value, do not worry and please take care when you are borrowing more than around 75%.

Lender Exit fees

2)   All banks usually charge a discharge fee of around $350. This administration fee is usually for their time but it’s important to check exactly what their fee is. These were much higher in past and in many $1,000s. New regulation introduced in 2011 banned exit fees.

Government Fees

3)   In NSW, the government fee is $107 to discharge a property and $107 to setup a new property. So around $214 per property.  If you have three properties it begins to add up!

See here- http://www.lpi.nsw.gov.au/__data/assets/pdf_file/0009/197433/2014_08_Land_and_Property_fee_changes_from_1_July_2014.pdf

Lender Setup Fee

4)   Most lenders are either charging a minimal fee of $0 or $100 but some are up to $500. Best to factor this in when considering to refinance.

Mortgage Duty

5)   If you are increasing your loan amount - It’s important to be aware that in NSW you may be liable for mortgage duty. In general you will pay this if you are NOT borrowing the additional amount for Property Investment. Please see http://www.osr.nsw.gov.au/taxes/mortgage/about

Total Fees = $0 + $350 + $214 + $100 = $650-1,000

New Lender Rebate

  • The good news; it is becoming standard for banks to be offering an incentive to borrowers to cover refinancing costs. Some banks are offering either up to $1,250 to cover the costs. So in reality it does not cost borrowers a cent to refinance, just their time.

In summary, I guess the way to look at it is to firstly find out what your current rate is and call a mortgage broker. They will be able to help you understand what is the best product in the market for you and in doing so help you understand if it is wise for you.

I know however if I  could be paid $3,000 for example after tax every year for 20 years for 4-6 hours work I would. It’s better to put some of those billions of dollars profit back in to your pocket not share-holders.