Refinancing your home loan during the COVID-19 crisis could help you to save money or depending on your strategy, even make money.
However, borrowers should consider getting the right mortgage and financial advice first and be aware of the potential downsides.
1. You could get a lower interest rate
The official cash rate is now at 0.25% which is the lowest it has been for over 60 years. In addition, banks are competing hard for new customers right now which means a much better home loan deal for you may be available in the market.
A convenient way is to try and negotiate a more competitive rate with your current lender first. However, you might find they won’t give you as good a rate as if you refinance with a different lender. This is because many lenders tend to offer new customers a bigger discount on rates to attract their custom. Make sure you read the fine print, however. Introductory rates and fees can mask the ‘actual rate’ as they may not be included in the ‘advertised rate’. The advertised comparison rate is where you should focus your attention.
2. You may have access to more flexible or suitable loan features
A different lender may offer you better features on your loan that you couldn’t get previously, such as an offset account, additional repayment and redraw facilities, an interest only option or a fixed or split interest option. If your current lender can’t offer you what you want from your loan, you should consider refinancing with a lender who can. These loan features may offer you more flexibility and/or help to save you money.
For example, if your goal is to simply pay off your loan faster whilst only having access to simple features such as redraw, a “packaged” loan with an annual fee may not be the right option for you. Some packages will offer you features that you don’t need.
3. You could reduce your loan term
The steadily decreasing interest rates seen over the past few years will have left some borrowers with extra savings. If this is the case for you, and your income is secure despite the COVID-19 crisis, this could be a good opportunity to pay down your loan more quickly by making additional repayments. This saves you money in the long run because you will reduce your loan term and pay less interest overall. If your current lender won’t allow you to make additional repayments, you may want to consider refinancing with a different lender so you can take advantage of this opportunity.
4. It may allow you to borrow against your equity to renovate
You may just have some extra time on your hands to consider planning a renovation. Now might be a great time to tackle that kitchen or bathroom renovation and if social distancing means you can’t get trades in you could still potentially get plans drawn up and submitted to council whilst you’re waiting.
If this is something you’ve been thinking about but you don’t have any savings, you may be able to refinance your home loan to release some equity. Equity is the difference between the value of your property and the balance of your mortgage. You may be able to access up to 80% of your equity through a refinance, depending on the lender, and you can use this money to renovate.
5. It can help you with cash flow
If you are facing significant financial difficulties, for example you have lost your job or your business has closed down, you won’t be able to refinance your loan right now. However, you may qualify for financial assistance from your lender, such as deferring your mortgage repayments, for up to six months. Similarly, you may be able to arrange to defer payments for bills if necessary.
6. Can you arrange a refinance under the new social distancing rules?
Yes. Lenders and professionals within the industry are all considered essential services and are remaining open for now*. Most lending specialists have access to remote tools to complete checking and in some cases can even offer digital loan contracts. The whole home loan process has been made easier with modern technology and you can arrange a home loan refinance via video conference, online or over the phone. The easiest way to arrange a refinance during this period is through a lending specialist who can access the right options for you, is up to date with the latest lender policies, and can guide you through the full process.
7. Be aware of the costs of refinancing
There can be some costs involved in refinancing, depending on your lender. For example, you may incur an exit fee for leaving your current loan contract early. This typically applies only on fixed rate loans, but check with your lender to determine what you would owe if you break your contract.
If you increase the size of your loan, you may need to pay government charges or other fees including stamp duty. In addition, your interest repayments will be higher and you will pay more in interest over the life of the loan.
You may also need to pay Lenders Mortgage Insurance (LMI) if you borrow more than 80% of the property’s value or if you can’t transfer your old LMI to your new lender. There can also be fees for your loan application, property valuation and settlement, although some lenders will cover these costs.
Of course, these negatives need to be weighed up against your personal financial situation and longer term goals. A good first step is to get in touch with a lending specialist to discuss your financial situation and look at your options. They can help you crunch the numbers based on your individual circumstances, so you can make an informed decision about whether or not to refinance your home loan during the COVID-19 crisis.