The cash rate has just been cut to a new record low, so it’s the perfect time to look at refinancing a home loan.
Too many people don’t realise it’s possible, baulk at the challenge of bargaining down the deal they already have or shy away from the potential hassle of changing lenders.
“But they may be missing out on very significant savings with a better rate and discounts if they don’t do anything,” says FinVu Home Loans broker Gerard Hansen. “Yes, it can be hard work to organise your finances and do all the paperwork to apply for what, in effect, might be a whole new loan, but it’ll certainly be extremely worthwhile in the end.”
How to prepare for refinancing
The key is to have all your ducks in a row, Hansen advises, before you approach your bank, another bank, a financial consultant or a mortgage broker who’ll look at all the possibilities.
That means producing payslips if you have a job or recent tax returns if you’re self-employed, as well as a list of living expenses for at least the past three months, including items like school fees, and what you spend on food, entertainment and holidays. You’ll also need to demonstrate a good repayment history to secure the best package possible.
“Your first assessment has to be your best assessment,” says Hansen. “If you decide to approach lenders independently, put in an application and it’s declined, then that goes on your credit history. If you then do that two or three more times and get declined, it’ll be on your record, and lenders might start seeing you as a bad risk.”
But what if you like your bank?
Deciding to do nothing is nearly always a bad idea. Most lenders know that, while customers might threaten to move their loan elsewhere, the vast majority won’t, says Justin Doobov of Intelligent Finance.
“Some people realise they’re losing money, but they might say it won’t make up for the pain of resetting their internet banking, or they feel comfortable with their current platform,” he says.
“It’s for those kinds of reasons we don’t want clients to move just for a better interest rate. The danger is one lender might be cheap today – but not as cheap tomorrow.
“So, it’s important to look at other factors too. Another lender might loan more money or offer a better loan structure with interest-only or a better tax outcome. So we’d do that at the same time as looking for a better interest rate.”
What to look for when refinancing
Property investing firm Dream Design Property founder Zaki Ameer says it’s essential also to look at the fees for applications, legals, valuation and settlement as well as the actual interest rates.
“You have to be clear on the purpose of refinancing,” he says. “Is it for that lower rate, or could it be you want equity release for investment? But whichever, don’t be tempted by just the honeymoon rate. Product features matter, for example, fixed rates mostly have no offset account.
“A combination loan can also be helpful, where you can fix part of the loan and have a variable rate for the rest.
“Be mindful that borrowing capacity varies across all lenders. Sometimes the cheapest rate doesn’t mean you can attain the borrowing capacity you need.”
Different lenders may favour different types of properties – houses or apartments – and different locations too, Ameer counsels. You need to find one that suits your needs.
There may also be some special deals being offered. An ANZ spokesperson, for instance, said that it currently has some cashback offers in the market for refinancing, ranging from $1200 cashback for loans between $150,000 and $250,000 to $3500 cashback for loans over $750,000.
Even when you do succeed in securing a better deal on a home loan, it’s always important to keep checking on what’s happening afterwards, Doobov warns. He’s come across clients who’ve been with the same bank for 20 years who assume they’re being looked after for their loyalty.
Instead, the rate at which they borrowed money initially has crept up slowly over the years until – just like the frog in cold water put on the boil – they don’t realise they’re being cooked alive.
“You show them how much extra they’ve been paying, and how they could have paid off their mortgage well before that point, and they’re shocked,” he says.
“They need to have someone proactively managing that loan all the time, and recommending when it should be refinanced to save money.”