Refinance explained

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“As a general guide, rates notices are a good way to determine the value of a property. Everyone has different perceptions about property value. The council valuations are done every two years and they are a good guide.” — Sean Young, relationship manager of mortgages with Professional Mortgage Manager

“I tell my clients that they can’t just look at the rates, they need to find a product that suits them.” — Tony Bazely, financial specialist with Lending & Leasing

“The dissatisfaction with service in the majority of the cases is due to lack of understanding of the customer by the providers and this leads to the breakdown of the relationship.” — Vinay Sharma, managing director of Simple Strategic Solutions, a division of Zimsen Partners

Intro: Indus Age takes a look at this useful financial tool

Story: If you are considering refinancing, it is very important that you narrow down your reasons for doing so. You should weigh up a couple of options, including staying with your current lender. It’s also well worth taking a look at some of the common factors that can impact your ability to refinance. Here are a few questions you should ask yourself:

Do you have a good repayment history?
Whether you’re refinancing with the same lender or moving to a new one, you need to have a squeaky clean repayment record to be considered.

How high is your Loan Variable Ratio or LVR?
In the current climate, many banks have dropped their maximum lending rate for refinance customers to 90% LVR, and there are only a handful of other lenders who will lend up to 95% LVR for a refinance.
This means that the majority of borrowers applying to refinance will be required to have at least 10% equity in their homes to satisfy lending criteria.

Are you likely to pay more LMI?
If you are considering a refinance within the first two years, the costs to exit your existing loan and enter your new loan are likely to outweigh any financial benefits. This is especially so if your original loan amount was over 80% LVR, as it is likely that you paid LMI. If you switch lenders too soon and your LVR still exceeds 80%, you may have to pay a fresh lot of mortgage insurance.

Is the switch worth the cost?
One of the most common myths about refinancing is that it will automatically save you money. As a rule of thumb, your calculations must show your finances in a better position within 12 to 18 months of refinancing. Otherwise it is not a better option.

Is your loan size too small?
Refinancing a loan amount of around $150,000 or below is likely to cost you more in the long run, because the costs to refinance in comparison to the size of the loan is likely to outweigh the benefit of switching.

Reasons for refinancing

Switching to a lower rate
If you’re chasing a lower interest rate, the golden rule is that interest rates fluctuate constantly. Banks and non-bank lenders increase and decrease their product rates at their own discretion, so a small rate differential shouldn’t be enough to prompt you to switch.
Tony Bazely, financial specialist from Lending & Leasing, finds that the biggest mistake people make is chasing rates. “I tell my clients that they can’t just look at the rates, they need to find a product that suits them.”

Lack of service
In his 17 years in the banking industry, Vinay Sharma, managing director of Simple Strategic Solutions, a division of Zimsen Partners, has found that the main reason people refinance is due to dissatisfaction with service from current lender. “The dissatisfaction in the majority of the cases is due to lack of understanding of the customer by the providers and leads to the breakdown of the relationship. The other reasons can be competitive pricing, lack of flexibility in the product and from service providers, as well as service providers showing a lack of proactive interest with their clients.”

Debt consolidation
Mr Bazely has been in the banking industry for about 36 years, and specialises in commercial properties with two offices, one in Keysborough and another in Carrum Downs. He says that he finds a lot of people prefer to pay that one bill a month. “We organise it so they have to pay just one bill a month. Having a personal loan is more expensive and a mortgage goes for 30 years as opposed to personal loans that go on for a maximum of ten years,” he adds.

If you decide to consolidate your debts, you should ask your broker to synchronise but maintain the consolidated debt as a ‘split’ separate to your original home loan. “Credit cards are so easy to get nowadays that if you are inclined to spend, you will,” says Mr Bazely.

Releasing equity
Accessing equity to your home is not as easy as it once was. Your property needs to be worth more than your loan. Be really confident of the valuation before going down this path. “As a general guide, rates notices are a good way to determine the value of a property. Everyone has different perceptions about property value. The council valuations are done every two years and they are a good guide,” says Sean Young, relationship manager of mortgages with Professional Mortgage Manager. He also suggests going to the local real estate agent who could provide you with a market appraisal and in most cases, this is done free of cost.

Way to go
According to Mr Sharma, the refinance process takes about four to six weeks after the finance provider has received your signed formal letter of approval. “To be able to achieve a better timeline it is important application forms are completed fully and correctly with most recent financial information provided to the finance providers. Most finance providers respond within to three days to confirm the outcome of your application.”

Inform your current lender
If you are refinancing to a new financier, you need to inform your current lender of your decision to refinance, so they can forward all required information to your new loan provider.

Pre-approval
The new lender will take between a few days and a few weeks to process your refinance application.

Valuation
Your new lender will arrange to value your property or properties if you have more than one. Generally, the first valuation is free, but the lender will often charge $200–300 for valuations on any additional properties.

Finance approval
At this point your lender will advise you in writing of your loan approval – this is generally called formal or unconditional finance approval.

Legally binding
The loan documents will be sent to your solicitor for review, and for you to sign. Alternatively, you can go over the contracts yourself, thoroughly reading the specifics.

Arranging settlement
Your new lender will arrange both settlement of your old loan with your previous home loan provider, and the establishment of your new loan. This involves exchange of titles and the bank’s registration of the mortgage over your property.

Drawdown
You now have a brand new loan! You should receive details on how to manage your new loan, along with all of your new account information, within one week.

Mistakes
According to Mr Sharma, the main mistake that people make is concentrating only on the price. “A client would be better to look at the total value being offered, which includes the provider being able to fully understand their goals and aspirations and how a provider can assist to meet these goals and aspirations.”

Almost all the mortgage specialists that we spoke to agreed on this. “Although banks are quite similar these days, individual products are quite different. The cheapest may not necessarily be the best as they sacrifice a lot of benefits,” says Mr Young. He also suggests taking a second opinion. “It is worthwhile to engage financial advisors, consultants or accountants before you commit to any refinancing offers.”

However, Mr Sharma insists that it is not a complicated process and that it pays to find out what other lenders have to offer because you stand to save a lot of money if you make the right moves.