In this uncertain environment, refinancing your home loan may have crossed your mind. However, knowing when to refinance is not a straightforward decision and depends on various variables and circumstances. The mortgage market is constantly evolving, and your own needs, circumstances, and preferences are also subject to change.
This article aims to make a case for taking swift action by explaining what refinancing entails, outlining five compelling reasons to consider refinancing, and providing guidance on how we can assist you.
When discussing refinancing in this article, we refer to external refinancing, which involves moving your loan from your current lender to another lender that better aligns with your current objectives and requirements. This is a common strategy employed by mortgage brokers to improve their clients' financial position.
Where inflation goes, the cash rate goes!
Earlier this month, the Reserve Bank of Australia (RBA) implemented its 12th cash rate hike since May of the previous year to combat high inflation, which has surpassed the RBA's target range of 2% to 3%. Like many advanced economies, Australia is currently experiencing its highest inflation levels since the 1990s. Factors such as pent-up demand, extensive stimulus spending during the pandemic, and disruptions in energy and food markets due to the conflict in Ukraine have contributed to this elevated inflation. In response, the RBA has raised the Cash Rate from its record-low level of 0.1% in successive increments of 0.25% and 0.5%, resulting in a rapid increase to 4.1%. This aggressive tightening of monetary policy has led to borrowers facing higher interest rates as lenders promptly pass on these increases. The market is anticipating that further rate hikes are on the horizon. The RBA will closely monitor global economic developments, household spending trends, and the outlook for inflation and the labour market when determining the timing and extent of future rate increases. Unfortunately for borrowers, despite positive signs, these factors suggest that the RBA still has a considerable distance to go in its tightening cycle.
If refinancing is on your mind here are five compelling reasons why you may consider refinancing with a new lender:
1. Refinance to pay less interest and save money.
Let us begin by exploring the potential for saving money through refinancing. Based on my experience, there are often opportunities to save money on a home loan by negotiating a rate reduction with your current lender or by seeking an alternative lender who is more willing to help you achieve your homeownership goals sooner while saving a significant amount in the process.
Three key factors contribute to these opportunities:
The notorious fixed interest cliff
Firstly, it is well-known that a substantial number of borrowers locked in their home loan rates at the start or during the pandemic when the cash rate was at its lowest point. Many of these astute borrowers secured fixed-rate loans for 2 to 3 years at competitive rates of around 2%. As these fixed loans gradually mature, they automatically revert to higher standard variable rates. Unless you have negotiated or received a big discount offer from your current lender, there is a good chance that your loan is not reverting to the best available rate in the market. In other words, your lender is unlikely to proactively provide you with the lowest available market rate.
Typically, we intervene on behalf of our clients by presenting competitors’ rates as benchmarks. We have successfully secured higher discounts by providing like-for-like comparisons and supported our clients throughout the process.
The Loyalty Tax
Secondly, there is a less apparent reason for this situation, known as the front book/back book differential or the loyalty tax. Many lenders fund the acquisition costs of new loans by relying on the interest rate margins paid by their existing customers. They subsidize the discounts offered to new customers using the surplus from existing customers. Lenders can get away with this practice due to human nature, as people often prefer to stick with their familiar lender and avoid the effort involved in the refinancing process. Consequently, the value proposition of mortgage brokers has become increasingly important, with borrowers seeking their assistance in growing numbers. According to the MFAA (Mortgage & Finance Association of Australia), mortgage brokers settled approximately 70% of all residential home loans in the first quarter of 2023. Mortgage brokers alleviate the burden of the refinancing process for their clients, resulting in savings and satisfied repeat customers.
The market share fight
Additionally, it is worth noting that lenders consistently vie for market share, leading to fluctuating offers and deals. One week, lender A might have the most attractive offerings to capture a particular segment of the market or fill a gap in their loan book, and the following week, lender B might react by making counteroffers. Mortgage brokers possess the necessary tools to stay abreast of these changes and compare offers from most lenders in the market. By leveraging this competitive environment, borrowers could secure the best available option at any given time.
2. Refinance to obtain a loan type that better suits your needs.
While refinancing often focuses on interest rates and saving money, it can also be about obtaining loan terms and features that better suit your current circumstances.
For example, you might want to switch from a variable loan to a fixed loan or split your loan between variable and fixed rates. Altering your loan repayment structure, such as transitioning from principal and interest to an interest-only basis, would typically necessitate a loan review. You may also seek loan features that enhance cash flow management and provide maximum flexibility, such as offset accounts or redraw facilities. Adjusting the loan term or taking a payment "holiday" are additional considerations. All these desired changes present an opportunity to compare available options in the loan market. Mortgage brokers can provide you with a free Product Comparison Report, enabling you to make informed decisions by comparing similar loan products.
If you have held your loan for a significant period, it is advisable to assess whether it still aligns with your evolving circumstances. For instance, you may have paid off other debts or improved your credit file since the loan approval, indicating that you are now a less risky borrower.
Alternatively, you might have exceeded your repayment schedule or made lump sum payments, reducing your loan-to-value ratio, and moving your loan to a lower, less risky (and lower-priced) security tranche. These factors demonstrate your creditworthiness, which may prompt lenders to offer improved terms, including pricing discounts. Mortgage brokers can determine if such events, along with factors like increased income or transitioning to full-time employment, would qualify you for better terms.
3. Refinance to access equity for a worthwhile purpose.
Another reason borrowers often choose to refinance is to access the equity they have accumulated in their property for various purposes, such as investing in real estate, shares, or other opportunities. While we are not property experts, we have assisted many clients in leveraging their property equity for wealth creation strategies. In some cases, clients seek funds for renovations or home extensions. Regardless of the objective, we possess expertise in understanding lenders' policies on equity release (commonly referred to as cash-out) for these purposes and can guide you in unlocking the equity in your home successfully.
4. Refinance to consolidate debts and simplify your financial obligations.
Refinancing can also simplify your financial life if you are managing multiple debts in addition to your home loan. Mortgage brokers can assist you in consolidating your other debts, including car loans, personal loans, and credit card debt, within your home loan. This consolidation streamlines your debt obligations, resulting in a single monthly repayment. Furthermore, consolidating your debts into your home loan allows you to benefit from the home loan interest rate across all your consolidated debts.
5. Refinance to receive better customer service and overall experience.
Finally, if you are dissatisfied with the customer service or values of your current lender, do not hesitate to explore other options. Many lenders in the market would welcome your business and may offer enhanced convenience, improved technology for transactions and access, and overall superior support.
How can we assist you?
If you have recently come off fixed rates or anticipate doing so, or if your circumstances have changed since you obtained your loan, we encourage you to contact us for a home loan check. This evaluation typically comes at no cost to you but has the potential to save you thousands.
As experienced mortgage brokers, we will conduct a comprehensive cost-benefit analysis, considering exit costs, application fees, and taxes involved. We will gain a clear understanding of your objectives and requirements, assess your financial circumstances, and find the best matching loan in the market for you. We will review various loan options and help you determine if refinancing is worthwhile. If it proves beneficial, we will crunch the numbers, conduct the necessary research, and manage the paperwork on your behalf, making the entire process easy and convenient for you.
No matter what your circumstances are, our Lending Advisers can actively assist you in navigating your current situation. Contact Hani Omran or Melanie Peter on 1300 795 515 or email homran@prosperity.com.au or mpeter@prosperity.com.au.
Credit assistance provided by Prosperity Finance Advisers Pty Ltd ACN 143 861 303 Prosperity Finance Advisers Ptd Ltd is a credit representative of Australian Finance Group Ltd ACL 389087