Through the trust we build with our clients we build a deep understanding of their goals, objectives and financial situation. These factors combine in providing clients with a roadmap to help them achieve what is important to them and their family. More and more we are seeing credit and finance strategies complementing this advice and helping clients decrease their debt, make their debt work more effectively and build wealth.
Here, we provide an overview of some common refinancing opportunities.
Consolidation of debts into one facility
Home loan interest rates are generally the lowest form of interest on any loan in Australia. Credit card interest rates can be as much as four to five times higher than home loan interest rates, while car loans and personal loans will have higher rates, all of which can prove to be a drain on finances.
As such, consolidating all of these debts into a home loan can potentially allow clients to pay off personal debts and reduce the interest payable on the overall debt. Considerations are:
Maintaining repayments at the same level to pay off the home loan sooner;
Using the savings from the reduced repayments for other investments; and
Structuring the facility to separate the consolidated debt from the original home loan and maintain the original time frame the funds were borrowed for. For example, if a motor vehicle depreciates over five years, aim to have this portion of the debt cleared within that time frame. This will ensure these debts are properly managed while having the benefit of the same interest rate as the mortgage.
Switching to a lower interest rate or more appropriate features
Interest rates change frequently, with lenders adjusting in response to economic influences, RBA rate movements and policy directives from industry bodies such as the Australian Prudential Regulation Authority (APRA). Additionally, second tier and non-bank lenders often offer lower interest rates when the big banks don’t.
As such, one of the major reasons people refinance their home loan is to secure a better rate to reduce their repayments, which can translate into improving their cash flow and saving a considerable amount of money over time. For example, on a $750,000 facility a half-a-per cent reduction in the rate translates into a saving of around $250/month in repayments.
Additionally, refinancing to a lower rate may offer a way to build equity through the savings, as well as take advantage of more competitive terms and flexible features through products that may not have been available when the facility was originally put in place.
Borrowers tap into the equity in their home for a whole host of reasons including: to use the funds as a deposit on an investment property; home renovations; upgrading their car; to assist with children’s education; or to invest in a business, shares or bonds.
When accessing equity there are many variables to take into account. These include the property’s value, the current loan to value ratio (LVR), the lender’s credit policy and the type of loan structures available.
Two common reasons people access their equity are:
1. Investing in property
Property investment is one of the most popular ways of building wealth in Australia. However, a key challenge is often raising a deposit and a common strategy is to unlock equity in another property to use as a deposit on an investment property.
Accessing this equity will increase repayments on the original property and add the associated repayments from a mortgage on the investment property – as well as the costs to run this. With good planning and the right property, these can potentially be serviced through rental payments.
Key to this planning is obtaining the right finance and undertaking property research. This will help to support the client’s capital growth and yield objectives and give clients a platform to build their wealth over the long run.
2. Accessing equity to renovate or extend your home
Renovating or extending to meet the needs of a growing family or a changing lifestyle is often a better option for some than purchasing an entirely new home. By accessing equity to renovate or extend a home, clients can create the home that exactly meets their needs and perhaps increase the value of their home to offset this cost over time.
Going from low-doc to full-doc
Lenders presently consider low documentation (low-doc) borrowers to be riskier propositions than full documentation (full-doc) borrowers. As such, these ‘high-risk’ loans – while suitable to enable some people to enter the market place – often have higher interest rates attached. As such, low-doc borrowers should evaluate their mortgage and their financial situation on an ongoing basis.
If a low-doc borrower can prove stability in their job and finances, including providing current financial statements and a solid paper trail, they may be able to switch to a full-doc loan to access a lower interest rate or other benefits such as lower ongoing fees or more flexibility.
Important considerations when refinancing include:
The value of your client’s property. This will determine the equity that can be realised:
What, if any, fees and costs are associated in changing provider;
Understanding the potential savings. This can be done by simply calculating the savings from the difference in rates and deducting the costs associated in switching products to see the benefits;
Other benefits that may not actually be savings, but could include access to new loan features or further cash equity; and
A client’s equity situation. If a client currently has a loan equating to more than 90 per cent of the value of their property assets – then they may be in or near a negative equity situation. Negative equity is where they owe more than the property is worth. This would become an issue if considering a refinance, which will formalise that loss and clients should steer clear of refinancing if that were the case.
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This information is current as at 17/01/19. This article has been prepared by Heart1Stop, a social media brand owned by Heart Mortgage Services and Heart Financial Advisers. The information contained in this article is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The views expressed here are not those of Heart1stop, Heart Mortgage Services, Heart Financial Advisers, shareholders, directors or staff and associated contractors and business associates. This article has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this article, consider its appropriateness, having regard to your objectives, financial situation or needs. Any taxation information contained in this article is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual’s situation may differ, and you should seek independent professional taxation advice on any taxation matters. While the information contained in this article may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of Heart1Stop or Heart Mortgage Services and Heart Financial Advisers that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and no party of Heart1Stop or associated entities as mentioned is in any way liable to you (including for negligence) in respect of any reliance upon such information. This article may also contain links to websites operated by third parties ("Third Parties") who are not related to Heart1Stop. These links are provided for convenience only and do not represent any endorsement or approval by us.