Is refinance my home loan a good idea?

Cheaper rate

One of the most common reasons to refinance a home loan is to find a cheaper loan. Sometimes, a borrower has been with the same lender for a number of years and what was initially a competitively-priced loan is now in the middle of the pack in terms of interest rate. To ensure you are paying the best interest rate on a home loan, look at the lowest-price, no-frills mortgages such as the Yellow Brick Road Rate Smasher. At a time when the major banks’ variable rate loans were around 5.4 per cent, the Rate Smasher was at 4.4 per cent. The difference between these interest rates, on a $400,000 25-year variable rate mortgage, is around $230 a month. A big enough saving to make the change.

Lower fees

Along with refinancing to a lower interest rate, borrowers also cite lower fees as a reason. If you shift to a loan such as YBR Rate Smasher or YBR Empower, there is a single application fee of $330 and then no ongoing monthly or account management fees.

Fixed rate

Some borrowers start with a variable rate loan and then want to fix their rate during a time when they are having children, or are reduced to one income, and need the certainty. Typically, fixed rate loans have higher interest rates than variable rate loans, but when you refinance to a YBR Empower Home Loan, the fixed rate is 4.65 per cent – lower than most major banks’ variable rate loans. In the Empower Home Loan range you can also split your mortgage between fixed rate and variable. When you change from a YBR variable rate loan to a fixed rate, you do not need to refinance: we can ‘switch’ you, which means we vary the contract rather than require that you reapply.

Increase borrowings

A popular use of home loan refinancing is to use rising equity in the property to increase the loan amount and in the process, release cash to the refinancing borrower. If you bought a property for $500,000 with a $400,000 loan, you have an 80 per cent loan-valuation ratio loan. If the property is now worth $600,000, and your loan is down to $380,000, you could do this: borrow 80 per cent of your property valuation ($480,000), refinance the original loan and be left with $100,000 in cash. You can use this as a deposit on a new property purchase, or use it for a renovation or consolidate debts that you’ve accumulated. Refinancing is a popular way to build wealth.

Debt reduction

If your first home purchase was with a no frills mortgage, you might now be ready to refinance to a home loan such as the YBR Empower. It has a very low interest rate for a fully-featured loan, and allows you to use features that help to reduce interest in the mortgage and use equity. The Empower Home Loan Package allows you to refinance to a loan (at 4.65 per cent) with an offset account attached. You pay all your income into this account and its balance reduces the mortgage balance by the same amount. It’s a great way to stop interest capitalising against you as fast as it does when you follow the repayment schedule. Or, refinance to a YBR Empower Line of Credit loan, which gives you a global credit limit within your mortgage – at mortgage interest rates – which you can draw down when you wish and use in anyway you want. It’s a highly flexible way to use your equity to fund a deposit in another property, or renovations, at a low interest rates.

Insurance

When you refinance to consolidate debt or release equity for funding assets, you will be increasing your loan size. You – or the main breadwinner in your house – needs to service this debt from income and this represents a risk should an accident or illness effect the ability to earn income. To cover this ‘risk’ side to wealth creation, see a Yellow Brick Road Financial Planner or Insurance Broker and assess which life insurances you and your partner should have, to cover the debts in case of a death or serious illness. The typical ones are death cover, which pays a lump sum upon death; total & permanent disablement (TPD), which pays a lump sum (usually the same as death cover) to a beneficiary should you be permanently unable to work; trauma cover, which pays a lump sum should you be diagnosed with a serious condition such as stroke, cancer and heart attack; and income protection insurance, which allows you to cover up to 75 per cent of your salary if you can’t work.

Advice

Sometimes when you refinance, you’ll be looking for a certain type of loan with distinctive features. Or you may just want to refinance to the cheapest loan or to a fixed rate or an interest-only loan. Mortgage brokers, such as those at Yellow Brick Road Mortgage Brokers, allow you to refinance to the best options in the market, with the features you need and at the best rates. They also put together the documentation and other paperwork, doing most the of the time-consuming work themselves. If refinancing is part of a broader wealth management scenario, see a YBR Financial Planner at your local YBR branch.