You sit down, you stare at your mortgage statement. Should you refinance?
You think am I on the best rate… Is this the right structure… Am I paying too much in fees…. Is my loan term correct… what happens when my interest-only period is up, can I afford my increased repayment…OMG, Should I refinance?
Anxiety sets in.
Where do you begin? Can you trust your bank? This simple way of quickly reviewing your mortgage will have you smiling all the way to the bank.
Now I’d like to throw another question at you that goes with the first. This makes it slightly more complicated, but I guarantee it’s worth it.
The question isn’t just How Soon After Buying A House Can You Refinance?. The 2nd question I want you to ask yourself is this.
- 1 Should You refinance your mortgage?
- 2 Mortgage Broker VS Bank
- 3 Remember These 2 Refinance Points
- 4 Future Financial Goals
- 5 Goal Setting Example
- 6 Repayment Reduction Trap
- 7 Mortgage Review Checklist
- 8 What Affects Your Interest Rate?
- 9 Mortgage Review Process
- 10 Interest Rate Questions
- 11 Loan Structure
This is the single most important factor.
If you can determine if you should, then you need not worry about the when. As the when will align with the should..? Make sense??
So, you are here because you’re not sure if you should refinance your mortgage so soon right?
Perhaps you think there’s a magic number of months you should be reviewing your mortgage or refinancing…?
You absolutely should be reviewing your mortgage every single year, but we will get to that.
We are going to discuss the reasons when and why you should be checking your mortgage and what you need to be looking at when you do so.
Depending on if it’s an owner-occupied property that you live in with your family.
Or, perhaps it’s an investment property.
I’m not here to bag either banks or mortgage brokers, that does little to help you. What we do know is that there are only 2 ways you can get a mortgage.
- A mortgage broker
- Direct with the lender/bank
There’s no other way, so let’s look at some statistics.
According to The Advisor – mortgage brokers make up approximately 57% of all home loans.
Yes, that’s right. More than half of all mortgages are submitted through a broker. Furthermore, this is increasing as the years progress.
Now, that’s close enough to say that the broker market to the direct loan market is pretty even currently. So, when you review your mortgage it is the same regardless if you use a bank directly or a broker.
Always Get Independent Advice
However, if you are looking for good quality “independent” advice. Use a broker, don’t go direct with a bank. A broker will be able to provide much more comprehensive advice across a larger range of mortgage products.
A good mortgage broker is worth their weight in gold. If you’re not sure and don’t have the time to research yourself definitely use a good quality broker.
If you want a recommendation for a good broker in your area and enter your details and we can put you in touch with someone we trust.
Now saying that you must BE AWARE!!!
And believe it or not… Banks don’t have your best interest at heart. Shocker!! Right!
So who should you trust…?
Trust Yourself. Knowing what you should be looking for is what’s important.
Whether it’s with a broker or direct with a bank, being knowledgeable will save you substantial stress later on.
Remember These 2 Refinance Points
- Banks don’t have to provide you with the most suitable product available to you. They only must provide you with what they have to offer.
So, by going direct to a bank you could be limiting yourself to only 1% of the products and rates available in the market. Missing out on 99% of the available mortgage products.
- Mortgage brokers are paid by the bank. This is standard however, remember if you refinance before a certain time the broker’s fee will be clawed back from the bank.
Depending on the broker they may try and keep you at the bank until the clawback period has ended. Or, worse push you into a fixed rate loan to “lock you in” to the mortgage product.
I don’t say the above to scare you. However, just that you realise the key differences between them.
Remember, if you have a good relationship with your broker they should be able to refinance you regardless as long as it’s in your best interest.
ASIC recently introduced (June 2020) a best Interests duty requirement. This is to further protect consumers to ensure that the most suitable product is the one that’s presented. This was introduced for mortgage brokers.
Now, the scary thing is that banks are exempt. Why? Who knows…
This means that banks DO NOT have to adhere to this 52 page regulatory guide. Our advice, USE A BROKER ALWAYS
What many ppl fail to realise is that refinancing your mortgage is pointless until you have established what your future financial goals are.
It’s like jumping on a bike and just riding without any direction, then wondering why you didn’t end up at the beach…
Goals are the beach – Your destination.
Your mortgage is the bike. One of the tools to get you to your destination.
Your goals are the single most important aspect of determining the right loan for your situation.
If you haven’t completed goals lately we strongly advise you do so using our very simple approach.
1 year, 5 year & 10-year financial goal plan. Most overcomplicate the goals setting process and then they end up putting it into the too hard basket.
Don’t let this be you.
This is a small example of how simple the process can be. The KISS principle (keep it simple stupid).
For a simple Goals Setting worksheet download our 1, 5, 10-year goal setting worksheet for free by clicking here
So if you haven’t done any goals yet – Start now. Spend 30 – 60 mins either by yourself or your partner.
Brainstorm what you want to achieve financially and start to put them into the sheet.
Just like riding to the beach.
Your 1-year and 5-year goals are the directions. Your 10-year is your destination. Remember, the sooner you start the sooner you arrive at the destination!
Now, mortgage review is only 1 part of your goal – However, for most people, it’s the largest part as most of us have sizable mortgages either for our own home or investments.
What we will attempt to go through with you is how to review your mortgage effectively.
Now I’m going to give you a quick example.
This example occurs the most and is a trap that many fall into. Especially if you haven’t completed your goals.
I can hear you asking me… What’s the repayment reduction trap you speak of?
Well it’s very simple
- The broker or bank gets you to focus on the repayments/short term.
Told you it was simple. Now you ask yourself, how can this affect me?
When you focus on just the repayment only, you could be making a huge mistake.
You have a property and mortgage that you’ve been paying off for the last 5 years (Could be 1 year, 3 years or 10 years.. the principle is the same).
You are paying Principle and Interest and it was set up as a standard 30-year loan term.
If you continue with this loan and kept repaying it, then you would have 25 years remaining (assuming that you didn’t pay additional repayments).
However, If the broker sends you a preliminary assessment to refinance (broker speak for providing you with your available loan options). They will have the loan term back at 30 years.
Unless you specifically ask for a different loan term, the loan term default is 30 years for residential mortgages.
They get you to focus on comparing your new loan repayments to your old current repayments.
BUT, if you took the original loan out when you were 35 years of age, rather than having the loan paid off at 65.
You now have unintentionally extended it until you’re 70 years old… WHAT in the Bleep!
So, before you refinance pls scroll back, download the goals form and do your GOALS.
Now, on the other hand, if you have a reason for decreasing your monthly repayments. Such as using the extra to invest then that’s fine.
We are all about you being aware of your goals and ensuring that each decision you make is going to help you get there.
I want to pay my home loan off as quickly as possible
I want to decrease my monthly repayments
One is geared towards mortgage reduction based on loan term (i.e. pay off in the fastest timeframe).
The second is to minimise the repayments so as to increase cash in hand (perhaps to invest or for other purposes).
Both are appropriate strategies depending on your goal and what you are looking to achieve.
We have put together an amazingly simple checklist that you can follow each time you want to consider refinancing your mortgage.
To ensure you are always on top of your mortgage you should review it annually. Or whenever your circumstances change.
Now the first thing that ppl do is review their rate.
There are 5-6 items that factor into what interest rate you will be given.
so, before you go and get upset about being .1%, higher than your friend, make sure you understand what goes into determining YOUR interest rate:
- Your credit score – Now, generally people with lower credit scores have a higher interest rate. So, if you have a poor credit rating or missed repayments, expect a higher interest rate
- We recommend getting yourself a free credit report from Credit Savvy – You can get a free account here. Look for ways to improve your score otherwise your options to refinance will be very limited.
- Property location – If your property is rural or perhaps in high density you might experience higher interest rates.
- Lenders have location exposure limits and project limits that can determine if you are going to receive a slightly higher interest rate
- Loan amount – If you have a small loan amount (sub $350k you might experience a slightly higher interest rate.
- Same goes for high loan amounts. Also, be aware of small loan amounts and professional packages. Many times the cost of the professional package outweighs the interest rate benefit received
- Deposit amount – The perfect loan to value ration point for a lender is 80%. Usually above this amount and your interest rate will start to increase.
- Also, you might have to pay substantial lenders mortgage insurance above 80%. If you refinance just be aware you might have to pay this all over again
- Property type – There is a difference between the interest rate of an owner-occupied mortgage and an investment property mortgage.
- Even if they are the exact loan product the investment will have a higher interest rate
- Repayment Type – There are 2 ways to repay a loan
- Principle and interest
- A loan with interest-only will always have a higher interest rate than a P&I loan.
So as you can see there’s quite a bit involved in just determining the interest rate for any given mortgage.
To start the mortgage review you look at 2 components.
Interest Rate & Loan Structure.
We’ve gone through how interest rates are calculated based on different factors.
So the first part of the review is to ask yourself the following questions:
Now if you need some additional information to go with what the above spreadsheet questions ask we have provided more detail below.
- Is my credit ok (as mentioned you can check with credit savvy for free)
- Is my property in a high-risk location (check with your bank) remember a high-risk property isn’t necessarily a high-risk property for another bank
- My loan amount
- Property Value
- What equity do I have available – If you originally had to borrow 90% of the property value you don’t want to refinance and save only a small amount of interest but have to pay thousands in Lender’s mortgage insurance again. Get a valuation done (your broker can assist) then determine if your LVR is 80% or lower. If it’s above 80% that’s ok, refinancing might suit your goal of decreasing your monthly costs by increasing the loan term back to 30 years.
- What type of property is it (owner-occupied / investment)
- Do you want P&I or Interest only?
The 2nd part of the review process is to check the loan structure and features and review these against your goals.
Fixed vs variable interest rate?
Now there’s a lot of contention about which is the best. We believe that it comes down to 1 thing.
Do you absolutely want the certainty of your repayment over the period of the fixed term to ensure you can meet your repayments?
If you answered yes then a fixed rate could be a good option.
But just be aware, if rates decrease your rate will remain the same.
That is why it’s important to look at your situation.
Historically variable rates have been lower over the long term. however, for people who want that certainty for the next few years fixed is for you.
The next downside to fixed rates is that if you are looking to either sell your property or refinance, if the interest rates have dropped you may have substantial fixed rate break costs involved in the process.
Also, another thing to be careful of is many lenders that offer offset accounts don’t offer a 100% offset account against a fixed-rate loan.
If you want to pay off your home loan sooner then a fixed-rate usually isn’t the best option as you are quite often limited in regards to redrawing surplus funds and paying down the loan at a faster rate.
However, if you are the type of person who wants to pay off your home loan sooner than we suggest a variable rate with a 100% offset facility set up against the owner-occupied portion of the debt.
So, after this if you’re still wondering which loan is best. Just ask you this 1 question.
Do you want to pay your home loan off faster?
If you answered YES
Then, you absolutely need a 100% offset variable loan facility.
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