How is your home loan doing?
The early part of the year is always a good time to take a hard look at your home loan status and review your options. Spending some time understanding how your current facility compares to what is on offer in the market could save you significant dollars.
Time to review?
It might be a while since you last paid attention to your home loan. A comprehensive “debt audit”, done by your broker, could either confirm that your current loan structure and interest rate is competitive, or it could highlight the need to either renegotiate or potentially refinance your facility.
- What can change?
There are a number of factors to take into consideration when reviewing your home loan.
- There may be larger interest rate discounts on offer compared to when you first applied for your loan. The banks do not automatically pass on these rates to you unless you renegotiate. For example, you may have a standard variable rate loan with a 1.00% discount, but new bank clients are currently getting 1.40% – 1.60% discounts. If you don’t proactively negotiate a larger discount, the bank won’t automatically pass this on to you.
- You may be at risk of interest rates increasing if you have a variable rate loan. It’s important that you are aware of how vulnerable you are to interest rate increases especially in the current circumstances. While the broader economy suggests that there should be reductions by the RBA, the banks’ cost of funds are increasing as a result of offshore funding becoming more expensive. If you are concerned about your loan repayments increasing, you may want to consider fixing all or a portion of your loan.
- If you have an Interest Only loan that is going to mature in the near future, it is definitely worth exploring what options are available to you. Historically, the banks would extend Interest Only term without much fuss. Today it is very different. The banks are reluctant to extend Interest Only terms for existing clients. If this is the case with your loan, you either have to live with moving over to Principal & Interest (which increases your monthly repayments) or you could consider refinancing to a new bank.
- Your fixed rate loan could be maturing in the near future. When fixed rate loans mature they automatically revert to a variable rate loan unless the bank is instructed otherwise. This presents an ideal opportunity to revisit your loan structure.
- Your personal circumstances may have changed, for better or for worse. These changes may require that you adjust your gearing strategy. If your cash flow situation has improved, you may want to consider swching from Interest Only to Principal & Interest. Interest rates for Principal & Interest loans are currently significantly less than Interest Only loans.
- Should you refinance?
There are a number of reasons why people decide to refinance. The key question to ask when considering refinancing is, “Am I going to be better off if I switch?”
Refinancing involves work, so you need to be sure that you are refinancing for the right reasons. On the other hand, there may be significant benefits in refinancing. These include:
- You may not be getting the service you require or indeed deserve from your existing bank. For example, some people consider online banking is essential while others may prefer walking into a branch and dealing with the bank face-to-face. Whatever your preference, your bank needs to provide the service that works best for you.
- The interest rate you are currently paying is significantly more than what is on offer elsewhere. However, it may not be worthwhile to save 0.05% and move to bank that has sub-par post-settlement client service. (On a loan of $500,000 a saving of 0.05% is a saving of $300 per annum. You may decide that the excellent service you are getting from your bank is worth the additional $300).
- You may want to refinance in order to increase your current loan amount, access equity for renovations, debt consolidation or future investment. Accessing equity is not as easy as it used to be. These days the banks want a clear explanation what the funds are to be used for. They call this “cash out” and are unlikely to support “cash out” loans if the real purpose is to fund lifestyle or even worse, service your mortgage.
Generally speaking, unless you recently set your home loan, it’s always worth conducting an annual check to ensure your home loan structure aligns with your personal and financial goals. Even if you decide that your current circumstances don’t require any changes, you’ll have at least done the exercise and be up to date with your options.
Having a conversation with your mortgage broker can also help you to understand how the home loan market is changing and how this could affect you now or when your home loan comes up for renewal. Either way, taking the time to be an informed consumer and keep track of your mortgage is well worth the effort.
