Dec 24, 2018
Welcome to Finance and Fury. Today we have Jayden with us, and we will be talking about negotiating with banks and refinancing.
Refinancing: Pros and Cons and how to negotiate Bank Valuations
Interest rates might go up or might go down.so this is all about asking, is my bank giving me the best rate? The difference between 4.55 and 4.5 could mean 10’s or 100’s of thousands of dollars over the life of your loan.
There are lots of reasons to refinance your home loan. If you have a home loan you are probably getting bombarded at the moment, from your next-door neighbour to the 7 o’clock news and they’re all talking about refinancing.
So is now a good time to refinance?
There are a few different situations where refinancing could make sense for you, so let’s go over a few of the main reasons to refinance your home loan in 2018.
First up, what is refinancing?
Refinancing is the process of taking out a new mortgage to repay an existing loan: often because there has been a change in your personal or financial situation, or simply because you want a better deal on your home loan.
1. I want to reduce my home loan repayments
If interest rates have changed since you got your original home loan you could be able to refinance into a new loan with a lower rate.
Let’s say your current home loan interest rate is around 4.50%, you owe $500,000 on your mortgage and current repayment is $2,534 per month. You could look at refinancing your home loan to a cheaper lender who can offer an interest rate of 3.75%, your monthly repayments would reduce down to $2,315 per month, reducing your repayment by $218.
How much are home loan repayments?
|
Loan amount |
$ 350,000.00 |
$ 400,000.00 |
$ 450,000.00 |
$ 500,000.00 |
|
|
3.75% |
$1,620.90 |
$1,852.46 |
$2,084.02 |
$2,315.58 |
|
|
4.00% |
$1,670.95 |
$1,909.66 |
$2,148.37 |
$2,387.08 |
|
|
4.25% |
$1,721.79 |
$1,967.76 |
$2,213.73 |
$2,459.70 |
|
|
4.50% |
$1,773.40 |
$2,026.74 |
$2,280.08 |
$2,533.43 |
|
|
4.75% |
$1,825.77 |
$2,086.59 |
$2,347.41 |
$2,608.24 |
|
|
5.00% |
$1,878.88 |
$2,147.29 |
$2,415.70 |
$2,684.11 |
The craziest part is the power of compounding interest.
Using the ASIC MoneySmart refinance calculator to do the numbers, if you were to switch to the new lender with an interest rate of 0.75% lower, on your mortgage of $500,000 you would not only save $218 per month but you would save $78,425 over the life of the loan! All by redirecting the extra repayment amount onto the principal.
2. My property has increased in value
Broadly speaking, property prices in Australia have increased over the past 5-7 years. If your property’s value has gotten a boost, you might be able to refinance and get a better rate. These days banks give better interest rates to borrowers with more equity.
For example, if you bought your home for $500,000 and had a loan of $450,000 but the property’s value has since increased to $600,000 you have increased your home equity from 10% to 25% and lenders will be more willing to give you larger discounts to get your business, reducing your interest costs and helping you pay off your loan faster!
What if values come back lower than what you thought?
Recent Case Study: Getting another valuation [from 2018]
As you can see getting another bank valuation resulted in a $130,000 increase in the value of the property. This is the exact same property, at the same time – just by different valuers.
|
Date |
Valuer |
Amount |
Difference |
|
September 2018 |
Bank Valuation 1 |
$640,000 |
– |
|
September 2018 |
Bank Valuation 2 |
$640,000 |
– |
|
September 2018 |
Bank Valuation 3 |
$770,000 |
$130,000 |
Challenging a Bank Valuation – Probability of Success
It is estimated that only 3 percent of clients are able to successfully challenge a valuation. However, it does not rule out the fact that bank valuations are not always correct.
Valuers can make mistakes and there are two main factors that affect the valuation of a property:
- The error made by valuers
- Their personal opinion
Effect of Valuation on Refinancing
Property valuation is crucial when it comes to refinancing. In case of a low valuation, loan to value ratio (LVR) becomes higher. High LVR requires lender’s mortgage insurance which ultimately increases the overall cost related to your home loan and decreases the equity amount that you can get access to.
Measures to Take If You Receive Low Valuation
- Find Out the Reason for Low Valuation - The primary reason for low valuation is the fact that valuers do not find any supporting evidence for comparable sales of similar properties, and are unable to find supporting evidence for the estimated value of that property.
- Look for Recent Sales of Similar Houses - You can also research yourself and find houses that have recently been sold and are similar to your house.
- Go for Independent Valuation - If a lender shows you a file that contains property valuation and you do not agree with the figures, it is better to get a private valuation. You can also go to another bank for the property valuation. In any case, banks always use the lower of the two valuations.
3. The fixed rate period on my loan is expiring
It is very common in Australia to have a fixed rate term of between 1 to 5 years. When your fixed rate finishes at the end of that 1 to 5 year period (or expires in bank talk) your loan will change back to a variable rate. In most cases this is the bank’s standard variable rate which doesn’t have any discounts! You can avoid this by switching to another fixed rate, or looking at your refinance options to maximise your interest rate discount.
4. I can afford to pay more off my loan
- Changing the length of your loan term can help pay off your loan quicker. If you can afford higher monthly home loan payments, maybe because you’ve had an increase in income, you could refinance to a shorter loan term.
- Look at reducing your loan term from 30 years, to 25 years helping you pay your home loan off faster, saving you literally tens of thousands of dollars in interest payments over the life of the loan.
- Example Before. Say you had the home loan of $500,000 and you refinanced your loan to a new interest rate of 3.75%. If you were to keep the repayments the same as what you paid with your old bank at $2,535 per month while on the lower interest rate you would save $133,229 over the life of the loan, and pay off your home loan 52 months earlier, or SLASH 4.3 years from your home loan term.
5. I want to increase my loan and take cash out
A cash-out refinance allows you to use the equity you have in your home to borrow money at a lower cost. You may want to invest these funds into shares, or use as a deposit of a new investment property.
- The example above, let’s say your house is today worth $600,000 and you have $450,000 left on your current mortgage. This means you have $150,000 in home equity. You could refinance to turn $30,000 of this equity into a home loan, bringing your total lending to $480,000.
- You can potentially above an 80% LVR (loan to value ratio) but you would need to pay for lenders mortgage insurance, so it would be best to talk to your mortgage broker and understand what these numbers look like.
6. I want to do some renovations
- After you’ve been in your home for a few years you might feel it’s time to do some renovations. These generally fall under 2 categories: Simple renovations, like adding air-conditioning, solar panels or painting, and Structural renovations, like adding an extra level to the house, a pool or new kitchen.
- If you are doing a simple renovation, the numbers work exactly the same as taking cash out and you would rely on the equity in your home. With Structural Renovations, you can rely on the completion value of the renovated property.
- So for example, if you are adding an extra bedroom and bathroom to the property which would increase the value of the home by an additional $100,000, the bank can lend on this figure. Using the example above, if adding an extra bathroom and bedroom increased the property’s value from $600,000 to $700,000 you could then increase the lending to $560,000 meaning additional lending of $110,000 which can go towards your renovations. The bank will want to see a building contract.
7. I want to consolidate other loans (and credit cards)
Lastly, you can refinance to consolidate other loans and debts into a single and possibly more affordable payment. This can be handy in situations where you have high-interest rate loans and debts like credit cards, personal loans or car loans.
A debt consolidation home loan refinance works in a similar way to a cash-out refinance, where an increased portion of the loan can be used to pay out other loans and debts. Your old home loan will be replaced by a new one that includes the amount you used to pay out those other debts.
Debt consolidation works well if you have lots of different credit cards and are paying really high-interest rates. The only downside when consolidating debts is to consider the new loan term, and what the total interest costs will be after you have consolidated everything.
If you have any questions or queries let us know at the contact page here.
Additional resources:
How to challenge a bank valuation
https://www.huntergalloway.com.au/how-to-challenge-a-bank-valuation/
Reasons to refinance your home loan