Experts say the process is simpler than it was some years ago, but it is important to consider more than just the interest rate when making the switch, especially as competition between lenders heats up.
Mortgage Choice broker Duane Mengel said more often than not, life events triggered mortgage holders to look at refinancing, and at the moment many of his clients were “bunkering down”.
“They’re checking all of their costs and making sure they’re not paying any more than they need to for streaming services, insurances…,” he said.
“I’m speaking to a lot of my customers who are looking at every aspect of their financial life and making sure they’re not leaking money because if you don’t look at this on a regular basis, you will leak money very easily.”
Thinking of refinancing? Here are some of the misconceptions and factors to take into consideration:
Loyalty is a myth
Staying loyal to your lender as a mortgage holder serves no benefit, Mr Mengel warn.
“The banks are loyal to shareholders, which is who they have their duty to be loyal to,” he explains.
“We need to review these things (your home loan) on at least a six to 12 months basis because when the banks are passing on rate changes…they’ll pass on their rate based on the headline but what they don’t tell you is what they’re passing on, or not passing on, in regards to the different Loan to Value Ratio (LVR) tiers.”
Propertybuyer chief executive Rich Harvey said people can become complacent about their lending.
“Every million dollars you borrow, it’s a significant sum. $60,000 is a 6% interest rate. That’s $60,000 a year that you’re paying.
“Now, if you can get a 1% difference in interest rate between different lenders, that’s $10,000 a year.
“So if you can think, ‘Well, do you want to give away $10,000 to the banks, or do you want to have it in your own pocket?”
Valuations devaluing your property
If you are looking at refinancing your home loan, your lender will require an up-to-date valuation on your property.
Whether you refinance with a new or your current lender, your property needs to be valued to see whether its value has increased or decreased, and that your LVR is still at an acceptable level to refinance.
Mr Mengel says there is always a misconception that a bank valuation devalued a property.
“Valuers are completely independent of the banks. They are qualified people who are giving a legal opinion on what they believe the property is worth at that time,” he explains.
There are misconceptions that bank valuations devalue properties. Picture: Getty
“But in saying that, the most banks now offer some type of automated valuation system these days.
“If the automated valuation is enough for customers, we just use that these days, so we don’t even have to have an on-site valuation.”
Smaller banks often require a valuation, but the bigger four banks do not normally require valuations unless something flags in their system, and it is assessed on a case-by-case basis.
Look beyond the interest rate
While there is a lot of competition amongst fixed and variable interest rate deals, Mr Mengel said choosing a loan with a lower interest rate might not be as important as the right loan structure.
This is where an offset account as a feature plays a key role.
An offset is a separate savings or transaction account linked to your home loan where the balance offsets the loan principal when calculating interest, which can reduce the amount of interest you pay on your mortgage.
“Offsets are probably one of the strongest things you can do, but you need to make sure you have that working effectively by having all of your all accounts with that same lender, because it’s always better to save interest than earn interest,” he said.
“Because if you earn interest, you’ve got to pay tax on it…if you’re saving interest, it’s 100% yours.”
Offsets helped by creating lower debt and a compounding effect, which can knock years off your loan while also preserving access to your funds in most cases.
Streamlining the process
It is easier now to refinance than it’s ever been, Mr Mengel said.
“One of the toughest things used to be is to get the bank statements required,” he adds. “With a lot of the open banking that’s now available, that’s the easiest thing we do is to get bank statements because with the federal government’s program, they can log in and we can have all of the account statements sent to us very quickly and easily.”
Refinancing can unlock debt equity in your property
Mr Harvey said refinancing can pave the way for new buying opportunities to grow wealth.
“Your home is a very significant store of wealth. Now you won’t realise that till you sell it,” he said.
“Also, don’t overload your debt, but also don’t undercut yourself. It’s a real balancing act of knowing what level of debt to go into to get into a home, but it needs to be sustainable.
“You need to map out your income, what it’s likely to be over the next 10, 15, 20 years, and where you see yourself over that period of time.”
Current market conditions are favourable for buying, he adds.
Low consumer sentiment thanks to rate rises and the government’s property tax overhaul have seen the market lose steam since March.
Delaying a change of home loan in the hope of interest rate cuts will then see more people face more buyer competition, Mr Harvey adds.
“The only thing against refinancing is that if you’re already over leveraged or over-capacitated, then you just want to refinance to get a better rate,” he says. “That’s really the reason you do it.”
Investors on watch
While the new tax reforms have removed negative gearing on residential property investments, the fundamentals of the property market are the same.
“The fundamental undersupply situation that Australia faced pre-budget is going to get worse now, post-budget,” Mr Harvey warns.
“Investors are kind of fleeing the market at the moment. They’re just doing nothing, and it’s going to take a long time for that market to recover.”
While confidence is at historic lows, it was still a very good time to for investors to consider refinancing to buy property right now, Mr Harvey said.
“I think investors are going to be more skewed toward getting higher yield type of properties,” he says. “It doesn’t mean they’re always better financially, but it’s going to be easier to hold those properties for the long term.”