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Considering Refinancing?

Higher inter-bank borrowing costs caused by the global creadit sub-prime mortgage crisis are impacting wholesale funding costs for banks, placing pressure on their profit margins. This has led local banks increasing their lending rates. Given the uncertainty of increasing interest rates these days it might be an opportune time for you to consider refinancing your current mortgage.

Some banks have taken unprecedented steps to increase their variable standard interest rates between 0.2 and 0.50 per cent independently of the Reserve Bank of Australia (RBA) in an effort to protect their profit margins.

Given the public outcry by our treasurer Mr. Wayne Swan urging for consumers to vote with their feet and look at opportunities to refinance their mortgage if they are unhappy with their current lender increasing the interest rates on their mortgage.

With consumer debt at record levels and the prospect of inflation escalating the RBA will no doubt further increase the cash rate with the underlying inflation rate currently at 3.6 per cent and with expectations to increase above this level will certainly mean that the cash rate rises may continue well into this year.

Refinancing may be a very enticing prospect (if you can find yourself a better deal) as you see your home loan interest rates rising however if you do not do your homework you could make a very expensive mistake. You should take the time to fully investigate your options by researching the market and fully compare what you currently have with what other lenders are promising.

Do you really need refinancing?

There are really only two main reasons to consider refinancing a mortgage:

  • to get more attractive terms and conditions such as lower rates and lower fees
  • to obtain a cash advance from the equity built up in the property
Other reasons maybe summarised as follows:

Reasons to consider refinancing your current home loan may entail some of the following circumstances:

  1. Increasing interest rates
  2. Excessive management fees
  3. Loan variation fees
  4. No product flexibility/lack of features
  5. Inadequate customer service/no personal banking
  6. Being declined for an additional new loan or increase
  7. You fell behind in your repayments and may be forced to look elsewhere
  8. Separating from a co-borrower and are forced to buy their share
  9. Consolidating debt
  10. Borrowing against your equity or restructuring your finances

The above list is not exhaustive and what ever the purpose may be you must be sure that you are refinancing for the right reasons.

There are a few simple rules to follow in order to minimise the risk of making an expensive mistake.

What ever the reason – refinancing should not be taken lightly.

How does refinancing work?

Refinancing enables you to repay an existing loan and replace it with a more competitive suitable loan with more attractive interest rates and perhaps with additional loan features.

Refinancing for more attractive terms and conditions (Rate-and- term refinancing)

Finding a mortgage that offers more attractive terms and conditions such as lower interest rates and lower fees would allow you to shorten the term of your mortgage pay less interest and build your equity faster.

Rate-and-term refinancing allows you many different restructuring strategies, including from a variable rate loan to a fixed rate component or to adopt a multiple sub-account portfolio loan structure taking advantage of more than one product line of the lender’s products arsenal.

Refinancing for Cash advance from built up equity (Cash- advance refinancing)

Cash-advance refinancing offers you additional surplus funds over and above the amount required to pay out your existing mortgage loan.

The surplus funds may be used for any worth while purpose whether for investing in shares or personal such as purchasing furniture or going on holidays.

Use our Home Equity Cash-advance Calculator for an estimate of your equity availability in your current property.

Costs to consider when refinancing

Refinancing should give you the opportunity of paying your mortgage off sooner if properly managed.

However in every case the process of refinancing will always incur costs and you need to thoroughly investigate and factor in all the bank exit fees and government charges into the equation.

Calculate the gains from refinancing and how long it will take to recoup the costs – refinancing may be more expensive than you think.

Your current lender will charge ‘exit fees’ - all or some of the following costs:

  • Costs incurred for breaking a fixed rate term loan prior to its expiry – economic loss for the lender
  • Discharge fee
  • Deferred Establishment fee
  • Early Discharge fee
  • Lender legal fee
  • Early repayment fee
  • Government charges

These fees should not be a surprise as they are clearly disclosed in your loan contract and covered in the terms and conditions.

Also you must consider that the new incoming lender will charge their setting up fee as well such as:

  • Establishment fee
  • Valuation fee
  • Lender legal fee
  • Fixed rate lock guarantee fee if you decide to fix your loan for a term
  • Lenders mortgage insurance could apply if the valuation on your property comes in short of expectation
  • Government charges such as stamp duties and registration fees
Look at your current loan contract’s terms and conditions for a full break down of what fees are applicable. Considering all the above fees and charges refinancing is a very serious step and careful consideration and due diligence must be exercised.

How do I choose the right loan?

Interest rates should not be the only determining factor when comparing home loan products Rather the fee package is the most determining factor to address and the level of personal service you receive together with terms and conditions of the loan contract.

Always start by asking your current lender for a better deal. If your lender does compromise or provide you with a more competitive offer than it might just be worth staying where you are. Alternatively if you feel that the competition is offering you a lower cost and more flexible product then refinancing could be right for you.

Remember that once you go through the trouble of refinancing your mortgage you should consider a time frame of not less than 4 to 5 years. Anything less will become very expensive and hardly worth while.

Some basics which always hold true

  • Usually low interest rate loans have a higher on-going fee structure
  • Usually higher interest rate loans have a lower on-going fee structure
  • Fully featured Home Loan Packages have higher rates
  • Home Loan products with fewer features have lower rates
Some common considerations
  • Are you looking at combining your home loan with a fixed rate?
  • Is the variable rate lower than the fixed rates?
  • Do you require crediting your salary in your loan account to offset the interest?
  • Do you require a redraw facility?
  • Do you need to access your money via ATM network?
  • Is it an investment or an owner occupied loan?
  • Is an offset account suitable for you?
Questions to ask your new lender when comparing loans
  1. What are the costs to set up the loan?
  2. What are the costs if I decide to pay out or refinance the loan in the first 4 years?
  3. What fees apply if I decide to increase my loan limit/borrow additional money?
  4. What fees apply if I decide to change my product mix/structure sometime after the settlement date?
  5. What are the on-going/annual account maintenance fees?
  6. What are the ATM and transactional account fees?
  7. What are the government charges such as stamp duties and registration fees?
  8. Do I qualify for any interest rate discounts?
  9. What is the comparison rate on this loan?
Make sure that the answers to the above questions are put in writing. Once you have collected all the information and you are satisfied with the conditions you can then make an informed decision.

Remember that when you compare loans it must be on like-for-like product comparisons otherwise it is an exercise in futility. The end result in refinancing your home loan is that it should leave you in a better off financial position in the long run; ultimately it should save you money.

SUMMARY:

What factors determine the efficiency of a Home Loan Package product?

  1. Comparison rate of the chosen loan product whether a fixed rate loan or a variable rate loan
  2. Waiver of FEES: such as establishment fees, the annual package fee, monthly account keeping fees, ATM withdrawals fee (no matter which bank’s ATM machine you use), valuation fee, future loan increase fee
  3. Interest rate discounts; A Home Loan Package should provide rate discounts on the variable and fixed rates (to save you thousands in interest over the coming years)
  4. Loan flexibility – by implementing loan features such as; redraw of your credit funds, direct debit facilities, loan portability, flexibility of repayment options, salary crediting, offset account, internet banking. BPay.
  5. Increase loan mechanism: The feature that establishes your maximum loan limit and borrow the additional funds when required in the future for what ever purpose at no cost to you.
The above 5 points must be used as a benchmark when comparing a home loan package product.

So how do you find the right loan combination that meets with your needs?

Simply register on the Mybank network for a competitive home loan package.

Once you become a member of the mybank network (membership is FREE) you qualify for the mybank member home loan package designed for maximum flexibility with cost effective loan features that meets with the above 5 point summary.

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