Refinancing is essentially moving your loan from one lender to another or pulling equity from your home to finance another expense, such as a new property, a new car, consolidation of debts etc.
The main reason people refinance is to save money. It should come as no surprise that given the cost of living, people are searching for ways to save a dollar or two! In the month of June, 60% of applications lodged with MV Finance were for the purposes of refinancing.
WITH INTEREST RATES THIS LOW, IT’S A GOOD IDEA
If you have some degree of job security, refinancing is unquestionably in the homeowner's favour. With lower than ever rates, you can create more equity from your property, being able to make immediate inroads to your plans for your future plans, whether it be investing in property, shares, purchasing that boat you always dreamed of.
How Much Can I Save?
With the RBA’s cash rate currently at .10%, the chance for savings has drastically increased. Plenty of banks, including ANZ, Westpac, CBA, and NAB, have lowered their interest rates in an attempt to lure customers and keep the economy afloat. The best variable rates are under 3%, a number that can translate to much healthier savings accounts during an uncertain time.
Consider the following approximate numbers based on a 3.50% interest rate. If you refinanced to a 2.19% interest rate over the course of a 30-year loan, here’s how much would end up in your pocket:
How Much Equity Do I Need?
Equity is the difference between how much your home is worth and how much you have left to pay on the loan. So let’s say you buy your home at $500,000. If you pay off $20,000 in principal after one year and the value of your home stays the same, you’ll have $20,000 ($500,000 – $480,000) in equity. However, if your home value goes up to $600,000 in the same year, you’ll have $120,000 ($600,000 – $480,000) in equity.
When it comes to how much equity you need to refinance, this amount will vary depending on the lender you choose. For the most part though, the absolute minimum is 5% of the home’s value. Ideally, you should have at least 20% equity before you think about refinancing, though this is not always a possibility — especially when the opportunity to strike right now is so good. If you want to refinance with very little equity behind you, you may be able to use a guarantor in order to secure the loan. This person will essentially promise to pay back the loan if you are unable to.
How Much Will Refinancing Cost Me?
While refinancing is definitely a smart decision for many homeowners, there are a few fees which you’ll need to consider.
Here are the common fees that you’ll pay should you choose to refinance to a packaged home loan:
Discharge: Approx $350, this fee is the amount your original lender will charge to release your old mortgage.
Break fee: If you have a fixed mortgage this is something you will need to consider, MV can help you access this cost, it changes person to person depending on the details of the existing loan.
Settlement: Up to $600 approx, this covers the legal details of settling the new loan with all parties but is also much less in most cases.
Registration: Up to $180 approx, this fee is a charge of the State Government to register your loan.
Application and Valuation fees are generally waived when applying for a packaged home loan.
As high as these fees may seem, keep in mind these will be factored into the feasibility or your refinance and you could actually be charged much less, especially as lenders try to encourage more people to switch loyalties. Overall, the long-term benefits of refinancing greatly exceed the short-term costs.