Friday 16 October 2015
Article by Rebeccah Elley
Have you had your home loan since American band Limp Bizkit released its famous single "Nookie"? While your home loan may have had a rocking rate in those days, today it’s probably starting to show its age with a less than competitive rate and features attached.
The solution? Perhaps it’s time for an upgrade by comparing the home loan market for a better deal that will save you big bucks in interest and free up some extra cash.
For instance, say you have a $750,000 home loan with the average big four rate for owner occupiers of 4.67% (at the time of writing) and switched to UBank’s UHomeLoan Spring Offer with a 3.99% interest rate, you would save $86,042 in interest over 25 years - think of all you could do with over $80k!
Here are 7 steps to get you on your switching way:
A glorious rate may seem like the holy grail of the home loan world, but make sure you do your sums before switching to ensure the fees attached won’t negate the savings of the low rate.
Some of the costs you may incur when refinancing include:
Lenders mortgage insurance: Even if you paid LMI on your current mortgage, the bad news is you can’t transfer it over to a new home loan. So if you are planning on refinancing and you still have a loan to value ratio of less than 80% this means you’ll have to fork out the money for LMI again. This could drastically reduce any savings benefit you’d make from refinancing so it’s wise to wait until you have paid off more of the loan and have an LVR under 80%.
Break cost fee: If you’re signed up with a loan with a fixed interest rate, it’s important to remember that many come with a break cost fee if you try to exit the loan before the fixed rate period has come to an end. The cost of the break cost fee will depend on how long you’ve had the loan for, so if you’re nearing the end of the fixed rate period the charge will be lower than if you have just taken out the loan. To find out what you could be financially up for, you’ll need to contact your current provider.
Discharge fee: Another fee that is commonly charged when you refinance is a discharge fee. This is paid to your current mortgage lender for any administration costs associated with moving the mortgage title deed over to the new lender. Thankfully, discharge fees are usually only a couple of hundred dollars.
Upfront fees: When you apply for the new loan you may also be charged a range of fees including application, legal, valuation and settlement fees ranging anywhere between $0-$1,000. If you’re savvy and use your negotiating power you could wipe these upfront fees altogether by offering your other banking products to the lender like your bank account, savings account and credit card.
Once you’ve done your maths and decided that refinancing is for you, it’s time to narrow down the type of home loan you will be looking for. Apart from a great rate and low fees, here are some features to keep your eyes peeled for:
Repayment flexibility: Make sure the new loan gives you your choice of repayment frequency either weekly, fortnightly or monthly. Here at Mozo we always recommend choosing the fortnightly option as it’s a thrifty technique for getting ahead on your repayments. This is because there are 26 fortnights in a year, resulting in a month of extra repayments compared to the monthly repayment option. Just check out this example: A $2,000 monthly repayment will mean over a year you will have paid off $24,000. But if you instead paid $1,000 every fortnight, you will have slashed $26,000 from your home loan.
Extra repayments facility: Paying extra on top of your regular repayments isn’t offered by all home loans. So ensure you check that the home loan you’re considering comes with this flexible feature, to save yourself big bucks in interest. Our extra repayments calculator is a nifty tool for seeing how much you could potentially save. For instance, if you have a home loan of $500,000, with a term of 25 years and a rate of 4.50%, an extra repayment of $200 a month would save you $44,803 in interest and reduce the loan term by 2 years and 11 months.
Redraw facility: This feature comes in handy down the track for times when you need to draw upon the extra payments you’ve made on your loan to fund expenses like upgrading your family car or making extensions to your home. But of course redrawing on those additional payments will result in higher interest charges and a longer home loan term.
Offset account: If you’re not familiar with an offset account, now’s the time to become acquainted. Signing up with a new home loan that comes with this feature provides considerable flexibility, as it gives you a place to stash your cash (just like a bank account), at the same time bringing down the interest you pay on your loan, as the balance offsets daily against the principal of loan. Simple example: You’ve got a $400,000 home loan and $50,000 in offset account, this means you only pay interest on $350,000.
Line of credit loan: Another option you may want to consider is refinancing to a line of credit loan, as this will provide you with the flexibility of a revolving loan facility that you can draw upon up to an agreed amount. While line of credit loans provide great flexibility, only take out one if you’re actually going to use it because often the rate and fees are higher than with a standard home loan.
Step 1 and 2 are all about recon work, now it’s time for some action and your first move should be seeing what’s on offer in the home loan market. There are three main ways you can kick off your search:
Refinance comparison table: We have a dedicated refinance comparison table, which displays some of the top mortgage packages that are specifically tailored to refinancers.
Home loan search tool: Alternatively you can punch in your numbers into our Switch & Save Calculator, which will filter through over hundred home loans in our database matching you with the loans that will provide the biggest savings for you.
Home loan negotiators: Another way you can get a great refinance rate is by calling in the home loan negotiators. Lucky for you, here at Mozo we have a team of home loan experts who can help negotiate a great home loan deal on your behalf. Contact them here.
Almost there! After you’ve picked the home loan winner, it’s time to get your documentation ready to apply for the new loan. You’re probably a seasoned pro already but here’s a quick reminder of some of the docs you may need:
Please note that this is just a rough guide of the paperwork that may be required and you’ll need to check with the lender for more specific requirements.
Next up the lender will provide you with conditional approval and value your property. After this if the lender is happy to approve you for the home loan they will grant you formal approval and draw up the contract.
Once they have drawn up the contract you can choose to have it either sent to your home address or your solicitor for review. If you will be reviewing the contract yourself, you’ll need to get a justice of the peace to witness your signature. You will also need to sign a discharge authority letter to provide to your current lender.
Mozo tip: When you receive the contract make sure the rate reflects what you have been quoted.
When you have signed the contract and provided your current lender with the discharge authority notice, the new lender will liaise with your old bank and organise the transfer of your mortgage deed. And once draw down occurs, that’s it, you’ve refinanced your home loan and potentially saved yourself thousands, if not tens of thousands in interest!Home loan tips