Refinancing your Mortgage

 

It is well worth checking your current mortgage interest rate and features. If you haven’t taken the time to check your mortgage you may be paying too high an interest rate. Your current home loan may not have all the features that would enable you to pay off your mortgage quicker like an offset account. Refinancing can help you access these lower rates and better features

Let’s take some time together to see the steps required to refinance. You don’t even have to decide to refinance, just make the decision to check your current mortgage against what you could potentially qualify for. In the long run there could be thousands of dollars your missing out on saving by not doing so.

Refinance your home loan.

There are 5 basic steps to successfully refinance a home loan:

  1. Firstly make the simple decision to check your current mortgage.
  2. A simple phone call to ask your current lender if they could review the interest rate you are paying and if they could offer a better one
  3. What you need to know before you start researching refinance
  4. How to compare home loan options
  5. How to apply for a new home loan

1. Make the decision to switch

You may be wanting to:-

Refinance to a variable rate because your fixed rate mortgage is coming to an end

You may want to release some equity in your home for investment purposes or to purchase some consumer goods

You might be wanting to have a loan with offset and redraw features to assist you pay down your mortgage quicker

You may be wanting to refinance and consolidate multiple loan and credit cards into your home loan

Or you may want to reduce your repayments with a cheaper loan

Knowing the reason you want to refinance will help you to ensure you pick the loan with features that support that reason

2. Determine your financial circumstances qualify before your lender does.

Play at being a broker for your own home loan

Lets go through some preliminary steps:-

The first thing you should do is print a copy of your bank statements. Go through line by line all the debits.

Is there any items on the statements that reduce your affordability for a home loan? Can any direct debits or expenditure be removed or reduced? If there are then cancel those direct debits or expenditure. It’s not only how much you earn that will determine your borrowing capacity it is just as important that you control your expenses. Not just for your home loan review but also for your own net worth. If you’re not getting full use of your tv streaming services then determine which ones to cancel. If you’re buying lots of take way items could you save some money by looking at eating more home cooked meals? Its not only a new home loan that this will assist but it may improve your health and add years to your life. Well worth doing.

Secondly obtain a copy of your Equifax credit report. It’s your data these companies are storing. They provide that data to lenders who then make decisions based on that information to determine if they will lend you money and how much. At the very least check the information is correct. Do you know how many credit reports I have run to advise a potential applicant that they have a default or adverse listing on loan repayment history only to be told that it is a mistake? I have had success assisting customers correct the data on their credit reports, even when the lenders agree to remove a mistake it can take weeks for Equifax to act on those instructions, potentially putting loan application on hold while we wait for the information to be corrected. Running your own report to check the information is correct is free. Once a year or whenever you have a credit application declined Equifax has to provide you with your credit report at no charge.

Once you have your report check that there are no defaults or judgements recorded against your name. If there are any are they correct? If not seek help to have your file corrected. Being approved for a loan with an adverse credit file will mean a decline at the worst or best case scenario will mean you will most likely have to pay a higher interest rate dealing with a non conforming lender. Check also the number of credit inquiries you have recorded on file. Too many or too low a credit score and many lenders will decline your application. You won’t even get a chance to discuss the reasons as many lenders use automated loan processing systems. Look at repayment history of existing loans. If you have missed payments or been late with making repayments that information is recorded on your file and is a responsible lending flag to lenders. An adverse credit file will simply result in an auto decline and a polite letter telling you that you do not qualify. My advice is to take the time checking and take action if required. Your credit file is a very important tool that will determine your chances of getting a home loan. Check it before your lender does.

The third item on our list is to determine your serviceability of a loan. Can you afford the repayments based on your income and current liabilities and expenses (see how important is was to go through those statements?). There are many comparison websites to allow you the opportunity to determine potential loan limits and features.

You should also determine the Loan to Valuation ratio of your loan compared to your property value. You can obtain up to 80% of property value without incurring Lenders Mortgage Insurance. Remember LMI protects the lender in the event of your default but the premium is paid for by you. The reason for the 80% is that in the event of a forced sale that 20% equity is considered a buffer to cover sales and other costs to ensure the lender gets paid the loan back in a default situation. It may be your home but it is also the lenders security.

You can check the estimated price of your property again using online websites to determine estimated valuation. Divide your current loan by the property valuation to determine your Loan to Valuation ratio (LVR). Say your property is valued at $800,000 and your required loan amount is $600,000 it is simple to work out the LVR is 75% by dividing the Loan amount by the property value. If in your refinance you were looking at consolidating some other loans and providing some cash out for a new loan amount of say $640,000 you would again divide the new loan amount by the property value to determine the LVR would be 80%. Make sure if you choose to go over 80% LVR in your refinance that you factor in the Lenders Insurance as it could negate the savings you make by refinancing to a lower rate.

Again using online tools you could determine estimate monthly repayment amounts to ensure that you can afford those repayments. There is little point refinancing to a larger loan amount even at a lower interest rate if your new repayments put you into a difficult position in paying the loan repayments. Better to be conservative in your approach as your lender will as they assess your loan application

3. Some definitions to be aware of

Before you start researching, here’s a list of terms you should understand:

  • Application/establishment fee – This is charged by your lender when your loan is set up.
  • Arrears – Having loans that show late repayments. Please check your bank statements for overdue fees.
  • Asset – Something with a monetary value such as cash or shares or property. Your property is the asset that is the security for the bank loan.
  • Cash back/incentives – From time to time lenders will offer incentives to obtain business in the form of loan applications. $1,000 to $4,000 are examples of what has been seen recently. Remember don’t make decisions based just on rebates as once the sweetness of any rebate has passed you will be required to make the repayments and put up with the features of the loan product chosen as many of the cash back offers include the requirement that the cash back is paid back in the event you attempt to refinance out of the loan earlier than the qualifying period. There is very rarely something for nothing, like life really.
  • Comparison rate – Compares total loan cost including any fees charged by the bank. Government fees and discharging your mortgage fees are not included in the comparison rate. It assists a borrower to compare different loans that may have differing rates. The cheapest interest rate from a bank that charges a heft application or monthly fee can be more expensive with another bank with smaller fees.
  • Credit Report – This outlines your credit history and is a prediction of future loan conduct.
  • Discharge fee – Lenders can charge fees for you discharging your mortgage away from them. This fee will be listed in the fee schedule of the documents provided by the lender.
  • Fixed interest rate – An interest rate that is fixed for a term usually between 1 to 5 years. People who expect rates to rise may elect to fix their rate at a lower rate. It can be a guessing game and if you choose incorrectly there can be a significant break fee if you sell or refinance a fixed rate loan as the bank can charge you for the amount they could have continued to earn for the fixed rate period if in fact you predicted the rate incorrectly. Always check with your lender any break fees before electing to discharge a mortgage particularly where you are looking at refinancing to a lower rate to save money. It may end up being a cheaper option to stay with your current lender.
  • Interest – Most variable loans calculate interest on a daily basis and it is usually charged to your loan account on a monthly basis.
  • Introductory or honeymoon interest rate – This is the sweetener rate or advertised introductory rate offered by banks in their advertising to attract new business. It could apply for the first 1 or 2 years then increase to the banks standard variable rate which is significantly higher. Smart Tip – your lender may be charging you a higher rate than you could find in the market if you checked. Your bank relies on you not checking. It’s like a Lazy tax that you can avoid paying with just a little bit of effort. It may save you thousands of dollars
  • Loan term – The loan term is the period of time within which your loan is repaid.
  • Other fees – In a mortgage loan agreement the lender has to list all the fees and charges associated with the loan. If you have used a Broker they must by law provide you with a credit proposal which outlines all the expected fees and charges associated with a suggested loan.
  • Repayments – Your repayments are the amount paid back each payment date either weekly, fortnightly or monthly. This will include a principal component and an amount calculated for the interest for a principal and interest rate loan. If you have elected for an interest only loan for a period then your repayment is just the amount due for the interest for the repayment period. Usually loans are for 30 years unless you have chosen a shorter loan period.
  • Valuation fee – The bank will require a valuation report conducted for the bank by one of their panel valuers. This may or not be charged to you or it may be part of the application fee or it could be waived by the bank to attract your custom. The valuation will determine your loan to valuation ratio. The valuation report does not just provide your bank with the estimated value of the property it also may list any building defects or risk ratings the bank may encounter if they lend money against that security.
  • Variable interest rate – An interest rate that can vary depending on the banks advertised interest rate, any Reserve Bank reductions or increases that your bank decides to pass onto you depending on their funding costs.

There are some important features that if used well can save you lots of interest and assist pay off your loan sooner:-

  • Lender provided Credit Card – A credit card linked to your offset account is a valuable tool to reduce your mortgage costs if used wisely. The key is to ensure you pay the amount due in full on the statement due date
  • Offset accounts – An offset account is a transaction account provided by your lender and linked to your home loan. A true offset account will subtract the interest due in you loan account by the amount of that interest rate calculated against the money in your offset account. If the amount of money in the offset account matched your loan amount then there will be no interest charged for the period. The way to use an offset account is to deposit all your pay into the offset account to maximise any saving to be had in interest calculated by your lender. Use a credit card with a 55 days interest free period if paid on time and put all your expenses on that. When your credit card statement comes pay it in full to avoid any hefty credit card interest fees. The amount in your offset account will reduce the interest due and if you do not lower your repayment amount but stick to paying that same amount you will actually be paying off more of the principal of the loan by the amount that you saved in interest. This means you are paying your loan off quicker as well as saving in interest. An offset account is an essential feature of a loan if you have the mans to use it properly.
  • Redraw facilities – A redraw facility enables you to access some of the money already paid down on your mortgage in excess of what should have been paid. This can assist you access money required for your use without having to apply to the lender for money
  • Repayment holidays – This enables you, if you are not in any default with your loan, to stop making repayments as long as your home loan remains in credit.
  • Split loans – This gives you the ability to have both aa interest only and a principal & interest loan. You can determine the amount you want for each split.
  • Portability – Allows you to take your existing home loan with you buy a new property. This will mean you have the same BSB and account details.
  • Other – Lenders may offer other financial products such as insurance or investment products. These may be offered at a saving to you because you are a home loan customer. Checking these offerings against your existing facilities may further save you money.

4. Research

Research Research Research.

There are many online websites that compare different mortgages. Just make sure your particular circumstances apply to their offering. The advantage to this is that you can find out about various features and rates without needing to talk to anyone. The disadvantage is takes significant time to research various policies of a chosen lender to see if you qualify. What happens if your pay is made up of overtime or variable pay? What happens if you are a casual employee? What happens if you have just started a new job? All these factors could preclude your chances if you elect the wrong lender. Its not just a question of what rate you can find, it’s also important to ensure that your exact circumstances suit the policies of a chosen lender. Smart tip, always check the most up to date information online. An article online may differ from what the lender is currently offering or the policies that apply to that offering. I have seen policy change from when a loan is lodged to when it is assessed requiring a rethink of lenders suggested to a client.

Once you think you have identified a lender then transfer your research direct to that lenders website. Check that the features you want are part of the advertised offering. Check to see what other costs apply to your chosen loan. Once you think you have found a loan that suits you can apply directly to the bank. Be careful though to provide what they require to ensure it meets their policy. Hopefully you have gone through your bank statements to ensure they present a favourable picture and you have checked that your credit report is accurate before applying and that you understand that your circumstances suit that lenders policy.

Some lenders will shave overtime, rental income or variable pay. There is a big difference in what you qualify for with a lender who only allows 60% or 80% of some elements of your pay in determining your loan serviceability as compared to a lender that allows 100%. Each lender also will stress the interest rate of your other property loans so even if you are on a very good interest rate for another property they will add a buffer, usually at least 2.5%, that has the effect of increasing the monthly payments they will use to calculate what you can afford. They also use the stressed rate on the mortgage you are applying for meaning that what you can afford now does not necessarily mean you can afford it in the future once any possible interest rate applies to your loan. Different lenders again have different policies on this buffering of interest rates so do check that before deciding. The measures are designed to reduce as much as possible putting a borrower into hardship and are non negotiable with the lenders.

You could use a Mortgage Broker to help you refinance

This could save some significant time as a good mortgage broker will assess your circumstances before suggesting any particular loan. Those policies that are important to your chances of getting a loan will also be considered to ensure that your circumstances should qualify you to apply with a particular lender. They will conduct a preliminary assessment of your circumstances to determine affordability and a credit proposal will outline an option that is not unsuitable for you. The advantage to using a good broker is that not only will they do the research for you they will also do the application directly to your chosen lender and handle collating the documentary requirements needed to have your loan approved.

Just ensure your broker has access to Bank Statements tools, Credit reports and understands different policies of many different lenders. There is little point to the savings of using a broker if the broker submits your loan to the wrong lender and your loan is rejected because it does not suit policy.

A broker is paid a commission by the lender and should only charge you a fee for service if that fee is disclosed in a credit quote and signed by you.

Smart tip is to make sure your chosen broker has either a Credit License or is an authorised credit representative. This information is recorded with ASIC and you can check your brokers credentials because one of the first steps that will occur in dealing with a broker is you will receive their Credit Guide. This document will have the registration details of the broker, contact details and any dispute resolution membership the broker is a part of.

A good mortgage broker is required by law to conduct themselves in a professional manner. You will receive a credit guide, a preliminary assessment, a credit proposal and, if there is a fee involved, a credit quote. A great mortgage broker will have access to a good cross selection of lenders and be able to navigate policies to suggest to you a in a credit proposal a loan that suits your circumstances.

5. The application process

Once you have determined your best option for a loan then you can fill in the application form and prepare the supporting documents that your chosen lender will need to approve your new loan.

A summary of what will be required is:-

  • Identification – Consumer lending is governed by significant regulation. This includes Know Your Customers rules that require lenders to properly identify who they are dealing with. Not only will you have to be able to write on the application form the identification numbers and expiry dates on your identification documents you will need to provide copies of those documents for verification purposes. Australian citizens can qualify for identification procedures by the provision of photographic ID documents such as Drivers License and Australian Passports. If you don’t have a passport you may have to provide a certified Brith certificate and other documents such as Tax assessment notices or rates notices. The ID process is an important aspect of a loan application If you can’t adequately identify yourself you cannot qualify for a loan. Address details will also be checked and depending on policy up to 3 years of address history must be provided.
  • Circumstances – Depending on your family situation your application will be assessed based on if you have a spouse, how many children you have, how much income you have and very importantly what your living expenses are.
  • Employer Details – You will need to show – depending on lender policy up to 3 years of employment or self employed business history. This will include contact details of employers and provision of current payslips and Tax assessment notices. Self employed applicants will be required to provide full tax returns for their business. Smart tip is to make sure your lender allows for add backs of income that your accountant may have reduced to offset as a tax deduction against income. Items like depreciation and one off expenses that reduced your income for tax purposes can be added back to improve your serviceability for a home loan. Again it is important to research lender policy to understand how they will assess your application. If there is variance between the two years of financials some lenders will take the lower of the two potentially causing a rejection of your loan. It is important to check this policy as if there is a variance it may be better to choose that lender who will only require one years financials, particularly helpful if the business has been going for two years but the first year was a start up phase without decent income figures.
  • Expenses – This is one of the most important aspects of the loan application process. Each lender is required to ensure living expenses have been factored in to determine your loan affordability. Some will at the very least expect your expenses to be in line with the Household Expenditure Measure (HEM) which is a benchmark of expenses that apply to different size family groups and takes into consideration income amounts to determine an expected level of expenses for your situation. Some lenders policy will require you submit bank statements to verify living expenses whereas others will rely on HEM or their own version of it. If your expenses are too high you may not qualify for the loan. I have seen instances where people wanting to refinance the mortgage they qualified for two years ago apply and cannot service for the exact same loan size with similar income they first applied with because of improved lender expense verification procedures. Can you imagine being told “sorry you cannot refinance to a cheaper mortgage, you cannot afford it”. I’ve seen it happen. Understand your expenses and how your chosen lender will assess them. 

Once you have provided all the supporting documents and they have been assessed you may receive a Conditional Approval. This will require usually a valuation and a credit check if one has not already been done. You consented to a credit check when you signed the lenders application forms. Hopefully you already know whats on it as, if you have followed these suggestions, you will already have ran your own credit report and had corrected any errors

Once the valuation has come back and the lender is confident of not just you as a suitable applicant but also the safety in lending against the security mortgage documents will be ordered from the lenders panel solicitor. It is very important that you check these thoroughly to make sure they are correct and that there are no unexpected fees or charges. Obtaining independent legal advice about your contract is a good idea to assist in the process before signing and returning the documents.

Your outgoing lender should be sent a discharge request once you have been approved for a loan as they make take several weeks to prepare for discharge and book settlement in with your new lender. Your lender will require a Certificate of Currency for the security they are lending against covering any damage or destruction of the property. If the property is located in a bushfire zone then Fire Insurance will also be required. Your lender will need to be noted on that policy and your lender will not book in settlement until you provide the Certificate of Currency They will provide payout figures including a discharge fees and will not release the title until your new lender confirms they will be paying the fee out. At settlement the new lender takes security of your title and Congratulations your loan has settled.

Once settlement has occurred you will be able to access your new account on your lenders website, set up or change your direct debits and also to notify organise to pay your wages or business income into your offset account to start that process of minimising interest and paying off your mortgage earlier.

So there you have it. Refinance your own mortgage or have a good Mortgage Broker handle the whole process for you. Either way please do check your existing mortgage, you could save tens of thousands of dollars. http://www.revive.net

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