Thinking about refinancing your home loan? Now might be the perfect time

Home refinancing is under the spotlight at the moment as low interest rates and booming house prices open up possibilities for savvy home owners.
Home refinancing is under the spotlight at the moment as low interest rates and booming house prices open up possibilities for savvy home owners.

One of the consequences of these pandemic times has been to focus people's attention more on their finances.

We're looking more closely at our budgets, working out how to save more and also how to be smarter about making our money work harder for us.

One of the big questions being asked by home owners is, 'Should I investigate refinancing my home loan?'.

The answer is absolutely. There has never been a better time to do it. Official interest rates are at historic lows presenting a once-in-a-lifetime opportunity to get the best possible deal on your mortgage.

Many owner-occupier Australians are grabbing the chance. In December, refinancing of property loans was up 10.3 per cent month-on-month and nine per cent year-on-year.

Unlocking opportunities

Refinancing your mortgage can achieve more than just saving cash and reducing and reducing the life of your loan. For savvy home owners it also provides an opportunity to unlock the growing equity in your home and provide a pathway to property investment.

Right now, home prices are booming in many areas, in cities and regionally. Prices in Australia jumped by 2.1 per cent in February, the biggest month-on-month gain in almost 18 years, according to CoreLogic's national home value index, adding tens of thousands of dollars in value to homes.

Creating a perfect storm are several factors, from the low cash rate, to a shortage of properties for sale, to the sea and tree change trend super-sized by COVID-19, plus the many thousands of Australian ex-pats now heading back, with money in their pockets and needing a home.

"We're in a housing boom and prices will continue to rise for the next two or three years so we're finding lots of home owners aren't refinancing just to get a cheaper rate," said finance expert and CEO of Savvy, Bill Tsouvalas.

"They're also recognising this as a good time to unlock some of that equity and buy a second house without having to save up for the deposit.

"It's your money - it's just tied up in the house. So you can use the existing equity and not have to contribute any actual cash to make that investment purchase."

But refinancing to buy won't be the best choice for everyone depending on their financial circumstances, the value of their property and how much is left to pay on the loan.

You will want your loan-to-value ratio to be above 20 per cent. If it's below that lenders may ask you to pay Lender's Mortgage Insurance, adding extra costs to your investment.

"But if for example you have a million dollar house and you only owe $500,000 you could access $300,000 in equity without paying mortgage insurance and you can use that as a deposit for a second house," said Mr Tsouvalas.

Secure the best refinancing deal

Whether you're considering refinancing your loan to just get a better rate, to maybe consolidate debt to get your finances under control, or to put that equity to work, there are some simple tips to help get the best deal.

1 Compare all your options. Whether you are using a comparison website or a broker make sure you do your research about what rates are available and the details of the home loan.

"Don't just walk into your bank's local branch," said Mr Tsouvalas. "There are 30 plus lenders in the market - some might be based in Queensland when you're in Melbourne, or don't have branches like Macquarie Bank.

2 Look for the comparison rate. Don't make the mistake of just looking at the advertised headline rate. Instead use the comparison rate which is designed to help you work out the true cost of a loan.

The comparison rate includes the interest rate and most fees and charges relating to a loan, reduced to a single percentage figure.

3 Check out the features. Look into whether the loan has features like free redraws and an offset account. An offset functions like a transaction account but linked to your home loan. The money in the offset reduces the amount of interest you pay on your loan. The more money in your offset, the less interest you pay.

"Having an offset account is a no brainer," said Mr Tsouvalas. "Say you have a $500,000 home loan and you have $50,000 in your offset account then you'll pay interest on $450,000 rather than the $500,000.

"Your repayment stays the same but a larger portion is contributed to your principal. The effect is that, if you continue to keep money in your offset, it's not going to take you 30 years to pay off your loan. It saves you interest and knocks down the loan term."

This story is brought to you by Savvy.