Off the back of the pandemic, changes to the local and global economy have impacted the lives of all Australians. With interest rate hikes, increased inflation and changing demand, the property market can seem very daunting.
BUT, for homeowners, it’s not a time for dread or worry, it’s a changing time that brings financial opportunities for those looking in the right place.
This is where Home Loan Refinancing comes in. Essentially, refinancing means that you are shifting your home loan from one lender to another, paying it out with the benefit of added suitability to your changing circumstances. With changes to interest rates across the board, it’s made repayments more expensive – making it all the more important to check out your home loan options to ensure flexibility and suitability for your unique financial goals.
So, before you go any further down the path of refinancing, check out these 7 things that you’ll need to know:
1. Your home’s equity
Has your property’s value increased or decreased since you bought it? Chances are, given the way Australia’s market has gone in the last few years, it’s gone up! This means refinancing could be an option for you, as this added equity impacts your borrowing capacity.
2. Your credit score
Looking at your credit score can often feel daunting – but don’t worry, it’s always helpful! Depending on your credit score (the higher the better), your lender may change your loan interest rate.
3. The costs of refinancing
Depending on the lender, you may be charged to refinance your loan – potentially around 4% of your loan amount. The great thing about shopping around is that some lenders offer to pay this cost if you move your loan to them – a win, win situation!
4. Debt-to-Income (DTI) ratio
As the economy changes, lenders have been known to change their limits on DTI ratios. This is ultimately to ensure that you’re not spending more than around 30-40% of your income on repayments. To calculate your DTI ratio, divide all of your debts (loans, credit cards) by your yearly income. Most lenders don’t love seeing a DTI above 6.
5. Rates vs the term
Aside from a low interest rate, you might be wanting to negotiate a shorter loan period. A balance of the two will ensure that you’re meeting your financial goals.
6. Your breakeven point
At what point will the costs associated with refinancing be recouped by the difference in your repayments? If it costs you $3000 to refinance and your repayment is $150 less per month, it will take 20 months for you to hit that breakeven point. It’s important to consider here whether you think you’ll sell your house prior to this breakeven point – if so, refinancing may not be your best option, as you’ll be losing money.
7. Taxes
In some circumstances, homeowners are able to claim interest paid on mortgage as a tax deduction – for example if you work in your home office, or run a business from your home. Ultimately, it is best to speak to your tax professional regarding the impacts of tax on your refinancing – however it is a great thing to be aware of.
Refinancing is all about looking at your options, allowing you to find the appropriate lender and terms to help you save money, both now and down the track. With increases to interest rates, it can be more financially viable to switch your loan to a new lender, as it may be more beneficial for you to move your loan from fixed to variable rates, or vice versa.
At the end of the day, we’re here to help you achieve your financial goals with clarity and comfort – we’ve got your back.
Are you looking to take the next step toward refinancing your home loan?
Want to know more about how the Rostron team can help?
Give us a call on 1300 70 70 39 – we’d love to chat!