As interest rates climb and the cost of servicing your home loan or investment loans start to move up, one consideration is to look at refinancing your debt.

Refinancing means paying off your existing loans and replacing them with a new loan, ideally one with a lower interest rate and most likely with a different loan vendor.  

But a lower interest rate is not the only reason to consider refinancing. There are many other reasons why homeowners refinance including:

• To consolidate debts under one loan (including credit card debts where the interest rate is substantially higher than a mortgage rate).
• To reduce the term of the mortgage.
• To move from a variable-rate to a fixed-rate mortgage, or vice versa.
• To tap into homeowners’ equity to access the value of a property.

According to Investopedia, you’ll benefit from refinancing if your new rate is at least 1-2% lower than the rate you have. But it is important to weigh up the fees and costs of refinancing in calculating the benefit of an interest rate reduction.

At Tribel, we would recommend doing some research as your first step in refinancing. Our advisers can do much of this leg work for you, assessing and comparing the loan products from banks and other lenders. But most importantly, they will assess your entire financial picture rather than just the loan refinancing.

Your home is a long-term financial commitment and with the most immediate objective to pay off your primary residence loan as soon as possible. There are several strategies to consider in terms of debt management and wealth creation and your home can play an important role in these plans.

On the debt side, the key to success is to ensure your debt is serviceable and to manage it within your risk appetite.

On the wealth creation side, the key is to take the emotion out of the investment decision making and utilise a structured, evidence-based approach. This may prove difficult if you have an emotional attachment to your primary place of residence.

Consolidating your debt

Refinancing to consolidate your personal debts may result in a savings as personal loans usually incur a higher interest rate. With interest rates now on the rise, there is increased competition between lenders to secure loans especially for refinancers. You may find some lenders offering sweeteners such as cashback when refinancing which will help in paying off the personal debt at the same time as cutting the overall interest rate across your debt.

Reducing the term of your loan

There are a few strategic changes to way you manage your mortgage that will reduce the amount you pay and/or reduce the overall term of your loan.

One simple option is to change your repayments from monthly to weekly or fortnightly.  By way of example, if your monthly repayments are $1,000, you would repay $12,000 per year. If you switched to fortnightly payments of $500 or weekly payments of $250, you would repay $13,000 per year. This comes down to different months having either 30 or 31 days, while weeks always have seven days.

Also look at paying above the minimum with as much as is manageable and comfortable. Creating an offset account will also significantly reduce the term and amount paid over the life of the loan (noting that offset facilities are not always offered on fixed rate mortgages).

Review your loan to value ratio (LVR) to negotiate a better deal

At the time of securing your first loan, you may have only had a small deposit saved. If this was the case, then you may not have been in the best position to negotiate the best rate for your loan. As your LVR improves, you may be able to negotiate a better rate.

According to a recent article by Canstar, editor Effie Zahos commented

“The average lowest variable rate offered by the major banks is 2.79% to 2.89% (for 70% LVR) and 2.90% to 3% (for 80% LVR). The average lowest variable comparison rates offered by the major banks range from 2.79% to 3.05% (for 70% LVR) and 2.90% to 3.15% (for 80% LVR).

“The average variable rate for a loan with a 95% LVR is 4.03%, whereas with a 60% LVR it’s 3.51%. So, if you’ve built some solid equity in your home, that’s a good reason to invite your lender to the negotiating table.”

These LVR rates were documented as of 11 July 2022, and have changed since then, it is best to get up to date information from your Tribel Adviser when you are ready to start the negotiation.

One note also on comparison rates, this is the true cost of the loan once all the associated fees and charges are taken into consideration and helps you compare the loan products offered by various lenders. 

Your financial situation has changed

Chances are over the course of a 30-year loan, your circumstances will have changed, perhaps even several times. As individual circumstances differ, so too do the requirements for a mortgage. Promotions, redundancies, growing your family, inheritance, location and equity are just a few of the life events and situations that determine which loan is most appropriate.

According to Canstar, more Australians are refinancing than ever before, perhaps to cut housing costs, figures from the Australian Bureau of Statistics (ABS) show.

The value of loans that were refinanced in June 2022 was 17.8% higher than a year prior, and for owner-occupied loans it reached a “new record high” of $12.7 billion for the month, which was 24.6% higher compared to the year before. These numbers dropped slightly to around $12.4 billion and 13% in July 2022.

Moving from a fixed rate to a variable rate or vice versa

If your fixed rate is coming to an end soon, it is important to consider the revert rate as it will have a big impact on your repayments. The revert rate is the rate your loan interest rate will revert to once your fixed period ends and it is usually set at the lender’s standard variable rate.

As a guide, the average revert rate across Canstar’s home loans database was 4.60% as of 18 August 2022. This is a vast difference to the average fixed rate loan with three years remaining, 2.26% as at June 2022, as reported by the RBA.. 

If your fixed rate is about to end, you generally have three choices:

1. Refix your home loan
2. Revert to a variable rate
3. Refinance your home-loan

If you choose to refinance at this point, most lenders allow you do to this without any mortgage break costs. But you will need to check the fine print of your loan terms.

Despite rising interest rates, the lending market remains incredibly competitive, and most lenders will reserve their best rates for new customers.

Using your home equity to refinance

As you pay off your home or the value of your home increases, you will start to gain home equity. This equity can be used in several ways to improve your financial situation. Equity is a valuable and often underutilised asset. Many homeowners have access to it but are unsure how to use it to its best advantage.

Equity can be used to fund home renovations, pay down or consolidate other debts or for retirement.  Many investors use their equity to begin to build up a property portfolio.

It’s important to weigh up the risks of this option including cashflow, tax implications and retirement planning.

Time to review your financial situation

It is important to review your entire financial situation and decide if refinancing is a strategy that would suit your current personal situation and that of your family.

You may be considering approaching your current bank or lender, or a mortgage broker, but we recommend seeking independent financial advice as a first step. The right advice can save you significant money in interest payments and fees. At Tribel, our advisers will look at your overall financial situation so that the decisions you make about your mortgage will benefit you now and into the future.