For many, home loan refinancing is a task on the household to-do list, which often gets pushed further down the list because it can be time consuming and let’s face it, a mind-numbing process, but the refinance process utilising the services of a mortgage broker are much quicker and less invasive.
The other part to refinancing your home loan is to do with the timing. When will rates be at their lowest, and property values and income levels at their highest. We take a look at why now is a good time to refinance;
1. Property values have increased significantly
The total value of residential property lifted $450 billion and prices in capital cities rose 7.5% for the year and the average price of a residential property in NSW surpassed $1,000,000 for the first time ever in the March quarter.
When the property you’ve purchased increases in value, the loan to value ratio (LVR) reduces. To put it simply, if you originally purchased a property for $1,000,000 and borrowed $850,000, your LVR is 85%. But let’s say your property is now valued at $1,300,000 - your LVR becomes 65%.
Whilst the LVR stuff seems like bank jargon, if you have a LVR below 80% you’ll receive lower interest rates.
Also, if you’ve selected to pay a monthly LMI (Lenders Mortgage Insurance) fee, rather than a lump sum, your repayments will stop once the LVR drops below 80%.
2. Interest rates are low… for now
While the RBA cash rate hasn’t changed since November 2020, there is a lot more talk around interest rates increasing towards the end of 2021. But rates are already increasing…
Major bank, CBA has now increased their 2 and 4 year fixed rates for the second time since April this year.
There is a huge difference between fixed interest rates and variable interest rates. For example, CBA’s Variable P&I interest rates for an owner-occupied property are 3.85% pa whereas their 2 year Fixed P&I is only 2.04%.
We are seeing lenders increase their fixed interest rates, as they are proving popular with borrowers keen to lock in lower rates. Now is a great time to secure a low home loan interest rate before all lenders increase their fixed interest rates.
3. Pay down your loan quicker
By reducing your interest rate, but keeping your repayments the same, you’ll start paying more of the principal loan amount and start reducing the term of your loan.
Let’s say your old interest rate was 4.89% and the P&I repayments on an $850,000 loan were $4,506 per month, then you refinanced to a rate of 1.84% but kept the repayments the same, you would reduce the loan term by 11 years and you’ll save $102,601 in interest!
4. Lockdown distraction
With 13 million people in lockdown and some NSW residents in their 7th week, now is a good time to distract yourself with a side project. Central Coast Mortgage broker Mint Equity is fully operational during lockdown to support clients with new purchases or refinances.
It’s simple to start the refinance process and we’ll take care of the process from start to finish for you. All you need to do is provide some basic documentation like ID, bank statements and employment information and we’ll get the process moving for you.
5. Inflation rates rising, cost of living calculations may reduce your borrowing capacity
Australia’s annual inflation rate has jumped suddenly from 1.1% to 3.8% for the twelve months to March, reaching the highest level in years.
As a consequence, lenders have already made adjustments to how they calculate a borrowers’ living expenses and HEM (Household Expenditure Measure), which is used to estimate living expenses and determine how much money someone can afford to borrow for their home loan.
Suffice to say, if inflation continues to increase, the HEM rates will increase and that will reduce the borrowing capacity for many borrowers.
Mortgage Broker Mint Equity receives weekly updates from all the lenders regarding policy and interest rate changes, so give us a call on 02 4340 4847 to find out how your borrowing capacity is affected.