Refinance case study: one conversation could save you $141,759

You might be surprised at the potential savings from refinancing your home loan. Emily and Jack bought their first home in Rozelle six years ago and had not reviewed their home loan since then. However, with recent changes to the market, they were now ready to discuss refinancing.

We looked at their financial position and discussed their goals. They were looking for a lower interest rate, better online services, to pay down their loan sooner and consolidate debts. Comparing over 30 lenders we were able to select a loan tailored to their needs and objectives.

We selected a loan with a lower interest rate, minimal fees, an offset account and redraw facility.  The offset account works for Emily and Jack as they both earn an annual bonus, and putting the bonus income in the offset will allow them to pay off their loan sooner by reducing the interest payable.

When we refinanced the mortgage, Emily and Jack also took the opportunity to consolidate their debts. By borrowing an additional $25,000 they were able to clear and close their credit card and car loan. This had the benefit of reducing their overall monthly loan repayments, and an additional benefit of streamlining their finances as they only had to manage the one monthly repayment. The lender we selected has an excellent online banking portal - something that was very important to Emily and Jack.

We selected a low interest rate with a $4,000 cash back incentive to maximise savings. With their $1,200,000 mortgage this refinance will save them an incredible $8,725.36 in the first 12 months, and a total savings of $144,759,000 over the life of the 30 year loan*. This savings, achieved purely by refinancing, allows Jack and Emily to pay off their mortgage sooner, a primary financial objective when we first spoke.

We are up to date with the latest market information and are committed to finding you the best possible rate. If you want to chat about the refinance options available to you, contact Garreth today on 0414 444 683.

*Interest rates are not fixed and will vary in accordance with the market.

Expert advice from a broker committed to finding the best solutions for your needs

What’s the difference between offset and redraw?

The difference between offset and redraw is not always understood.  So, what is the difference between offset and redraw?  Does it matter?  And how could it affect you?

Some of you who were following the news over the last couple of months may remember this story where ME Bank made some changes to their redraw policy.  Effectively what happened was that customers who had paid in advance on redraw loans had their advance payment taken away, meaning that they couldn’t access the advance payments.  There was instant outrage from their customers and the decision was quickly reversed.

What is redraw and how does it differ from an offset account?

On a redraw loan, the customer makes payments over and above the minimum monthly loan repayment.  This is an effective way to minimise the interest charged and to reduce the overall cost of the loan.  If needed you can “redraw” the advance payments to use for other purposes.

An offset by comparison is a separate account to the loan account, and any money sitting in this separate account “offsets” the balance upon which interest is charged on the loan.  If you had a $500,000 loan with $100,000 in your offset account you will only be charged interest on $400,000. 

Whilst a redraw loan lets you access your advance payments there’s a risk that the lender will take the redraw away.  There is often limits on the amount you can redraw and the number of times a year you are able to redraw.  Sometimes there is a fee for redrawing.

Offset accounts typically work like any other transaction account: you can access them at any time for any amount, you can have your pay paid into it etc. Loans with offset features often have an annual fee attached and can have a slightly higher interest rate.

Choosing what is right for you

So, which is better?  The decision between redraw and offset is ultimately one of personal preference.  Offset has greater flexibility but may have more costs and a higher rate.  Redraw is simple and usually cheaper, but you may run the risk of not being able to access the advance funds if and when you need it. 

Understanding the pros and cons of each will allow you to make an informed choice.  You as the consumer should think about your needs and objectives to make a call on what is best suited to you.

Why now could be a great time to review your mortgage

Reviewing your home loan regularly is sensible, and never more so than now where things are changing so fast.  We’ve recently seen the official cash rate slashed, and this has created a very competitive mortgage landscape.  There is plenty to consider before taking the step, and you should make sure you understand all the pros and cons.

One of the main benefits to refinancing is to take advantage of lower rates at a competitor, or sometimes even with your own lender.  Lenders will often put very competitive rates on the market to attract new customers, leaving existing customers paying more.  And the difference between one lender and the next could be thousands of dollars a year.

It could also be that your circumstances have changed since you initially took out your loan.  Perhaps you want to clear your credit cards and consolidate some debts, or want to access some equity to start that renovation you’ve been talking about.   

To make sure everything is factored into your decision, you will need to understand your existing rate, repayments, and fee schedule.  Will you have to pay LMI again?  Is there a break cost such as with a fixed loan?  There might also be other features such as offset accounts, or user-friendly internet banking for you to consider.

Your property value also comes into the equation, so we would look at some data to understand what the house or asset is worth.  

If you find an alternate option to your current loan that meets your needs and is going to save you money then it’s usually a simple decision to make.  

We can compare lots of different lenders and, if there is a better opportunity, we’re able to access it. We are always working to give you great advice that’s in your best interests.

Contact us today for a home loan health check.  You could save yourself some serious money.

Problems paying your mortgage

Most people at some point in their lives will have an event that interrupts their income and finances.  It could be that you are made redundant from a job, or are sick, or are impacted by a natural disaster.

Sometimes people take on too much debt, and find they are in a position where they can no longer afford all their financial commitments.

This article aims to give some advice on how to manage these situations if it happens to you.*

Contact your lender

This is the most obvious and sensible thing to do, however due to various reasons it is often difficult for people to reach out when in trouble.

Most lenders have a dedicated hardship assistance team who are well trained to understand your situation, and help you find a solution in an understanding and empathic way.  All consumer loans in Australia are regulated under the National Consumer Credit Protection Act (NCCP) which has hardship provisions to ensure you are treated fairly. 

Lenders are usually able to temporarily reduce or suspend repayments and can sometimes vary your loan to capitalise missed payments or extend the term to make repayments more manageable.  

Consider switching to interest only

If your loan is principal and interest payments, your lender might be okay with you switching to interest only for a period.  This will reduce your monthly commitment, freeing up some of your mortgage repayment so it can be used for other expenses.  There are pros and cons to this, and you should speak to your lender or broker to understand.

Consolidation of debts

If you have various credit cards and personal loans it may be worth considering consolidation into your home loan.  This will likely reduce your overall monthly repayments (often considerably), and most people find it easier to manage one loan repayment a month rather than multiple.  Speak to your lender or broker to find out if this is possible and the right option in your circumstances.

Sell or downsize

Obviously, this is a pretty drastic measure, however something to consider should your situation be that your ability to pay your debts is permanently reduced.  Particularly if you have an investment property, it might be wise and relatively easy to sell and clear your debts and re-enter the property market once your circumstances have improved.

Speak to a financial counsellor

If your situation is serious or more long term you may want to speak to a financial counsellor.  A counsellor can speak to your creditors on your behalf and can reduce some of the anxiety that comes with financial hardship.  Counsellors to do not charge for their services and there are bodies in each state of Australia.  A counsellor may also explore other options with you such as Part IX, Part X, and bankruptcy.

Seek additional support through Lifeline or another trusted crisis support service

Being unable to pay your mortgage can be incredibly stressful for both you and your family.  Organisations such as Lifeline (phone 13 11 14) can provide mental health support and emotional assistance

 * All the advice in this article is intended to be general.  The advice provided does not make consideration of your specific financial situation, your objectives, or your needs.  You must consider the appropriateness of the advice before taking any action.

Buying with a smaller deposit - lenders' mortgage insurance

When you consider that an inner Sydney apartment could set you back a million dollars, saving a 20% deposit to buy can seem an insurmountable task. That’s where insurance can help.

Lenders mortgage insurance (LMI) may be an added expense, but it offers buyers the opportunity to dive into the property market earlier, without saving up an entire 20 per cent of the property’s purchase price as a deposit.

What is it?

LMI protects the bank or lender should a home loan go into default, guaranteeing that the lender will get its money back if the property needs to be sold and there is a shortfall in repaying the loan.

While a 20% deposit generally provides a good buffer against any drops in property value over the life of a loan, LMI can also provide the same protection, meaning borrowers can purchase property with a smaller deposit.

What’s in it for you?

For the borrower, it may seem LMI is just another expense to cover. But insurance can mean that some buyers will be able to enter the property market with, for example, only a five per cent deposit saved. For a million-dollar property, this brings the deposit down from $200,000 to $50,000.

And, if the market is hot and prices are rising rapidly, paying LMI so that you can buy now could be cheaper than taking the time to save a bigger deposit. In the time it takes to save a higher deposit amount, property prices may well have surged by more than cost of the insurance so, for some properties and purchasers, it can make good financial sense to purchase earlier even with the added cost of LMI, especially when you consider the rent that you would pay while you’re saving.

What you need to know

The insurance premium is generally a one-off payment, but you can usually capitalise it into the loan amount so that you are paying for it month-by-month along with your mortgage. 

There can be a big difference in premium amount paid.  If for example you have a 10 per cent deposit compared with a five per cent the LMI premium will be much cheaper.  It’s worth gathering all the extra funds you can muster, even if you despair of reaching the full 20 per cent.

How to pay off your home loan faster

Reducing the life of your loan isn’t difficult; there are many simple things you can do to cut years off your mortgage. Here are some tips that will help you be mortgage-free sooner than planned.

 Small extra repayments

One of the most obvious ways to pay off your home loan quicker is to make extra repayments. Depositing lump sums, such as a tax return or work bonus, will always be beneficial, however it doesn’t always take large amounts or windfalls to make a substantial difference – planning for regular, small cash injections can have a great impact over the life of a loan.

 Let’s say we give an extra $50 a fortnight on a $500,000 loan, that saves you $32,000 of interest over the life of the loan which in turn will save you just over two years,

 Switch your payment intervals

If you find that you don’t have the discipline to make extra repayments, then simply switching your payment structure can also help save years off your mortgage, as well as simplifying your finances if you are paid fortnightly.

 Because there are 12 months in a year but 13 four-week cycles, by switching your payment intervals from monthly to fortnightly, you are essentially paying off an extra month per year.

 Make sure you have the right type of loan

Ensuring your loan allows extra repayments without penalty will let you to make the most of bonuses or funnel small extra payments to reduce the loan principle more quickly, saving on interest immediately, while an offset account will use your savings or living expenses to reduce your principle, while still allowing you to access these funds from a transaction account.

 Offset accounts are particularly useful. Because interest is calculated daily but charged monthly, any money sitting in the account will help reduce the loan.

 Although you may have to pay extra fees for the offset or redraw account, these may well be lower amounts than the interest saved. Talking to usis the easiest way to work out whether this option is financially sound.

 Paying off your home loan faster isn’t difficult, however it does require financial discipline and expertise in ensuring the right loan features are in place.

Guaranteeing your child's loan

Being a guarantor generally means using the equity in your own property as security for your child’s home loan. It can help a first-home buyer to secure finance for a property they can afford but may not have a large enough deposit for, and to avoid the added cost of lenders mortgage insurance.

There are other advantages as well. By guaranteeing a loan, you’re helping your child enter the property market sooner.  Also, your child may be able to buy in a more desirable location and a home that better suits their needs. If they did it on their own, they may need to go further out of the city or perhaps settle for fewer bedrooms.

You may want to help your child but it’s important you don’t go into the transaction blindly.

The main risk of guaranteeing the loan is that, depending on the structure of the guarantee, you could be liable should your child default on the payments, either by taking over the repayment schedule or handing over a full repayment.

If you can’t make the payments, the lender may sell the home used as security. If this is still not enough, the lender may also require you to sell assets to meet outstanding debt.

Another major risk is a bad credit rating if default occurs.

Plus, if you need to borrow money for another purpose, your property cannot be used. If for instance you want to buy an investment property, you can’t use the equity in your home because it’s already tied up in the child’s loan.   

There are ways to minimise the risks. The most common is using a monetary gift or private loan. This involves borrowing money against your property in your name, and then gifting it to your child.  It is wise to have a legal agreement in place.

Another way to avoid the risk is to buy the property jointly with your child. This means your name is on the title and you have a certain percentage entitlement.

Finally, outline an exit strategy. Financial situations change and, as the loan decreases with repayments, there may be an opportunity for you to withdraw your support to free up your assets without impacting your child’s loan.

Understanding Credit

Have you ever wondered what a lender looks at when assessing someone for a loan?
  
The fact of the matter is that there are innumerable variables that come in to consideration – way too many to cover off in a short blog post – but there are some basic tenants that are helpful for a borrower to understand when they are getting ready to apply for a loan. 
  
First and foremost, a lender will want to know about your credit history and will check your credit file.  Obviously if you have defaulted on a previous loan they will want to know about it, but there are more clues on a credit file than basic defaults or bankruptcy.  For instance, if there is a pattern of lots of enquiries for credit this may influence whether you are seen as credit worthy.  If you do have a default this doesn’t necessarily rule you out for a loan entirely. Sometimes, the lender can be influenced by mitigating circumstances, otherwise there are specialist lenders in the market who may still write you a loan with conditions (such as a higher interest rate).  There are also credit repair companies that can help with blemishes on your credit file.  If you are in a situation like this get in touch and we will see if Blackwattle can help you. 
  
Lenders will also want to see that you have stability in your personal circumstances. Factors such as how long you’ve been in your job and/or industry will be considered, and whether you have moved house frequently.  For self-employed and commercial loans, a lender will want to know that you have a good track record in business.  
  
The lender will also want to feel comfortable that you can repay the loan without experiencing undue hardship.  In short, they will not want to loan you more money than you can afford to pay back.  They will check how much money you have coming in versus how much you are spending on your living expenses.  Budgeting tools can help you stay on track of your outgoings, and you can estimate your borrowing power to see what is affordable for you.  
  
Your asset position will also come in to play.  What do you own?  Do you have property already, and if so, how much equity is there?  Do you have shares or other investments? Savings?  What other debts do you have?  And ultimately, what is the net position after your assets and liabilities are set off against each other.  This is pretty simple: the stronger your asset position the more comfortable a lender will be with giving you a loan. 
  
If you are looking for a secured loan (such as a home loan), the lender will want to know that the secured asset (the house) is worth more than the loan.  This gives the lender security that if something goes wrong that you will be able to cover the debt by the value of the asset.  Same rings true for any secured loan such as a car on a car loan, or business assets on a commercial loan – the lender will want to cover all or most of the debt with the value of the asset.  
  
Finally, broader macroeconomic factors will be taken in to consideration.  Things such as official interest rates, economic direction, and sometimes factors relating to your industry of business or employment will influence a lenders decision to give you money.  
  
A good broker will understand the factors considered by a lender and will be able to help you navigate the credit approval process and make the best case when applying for credit.  Get in touch with us now for help with your next loan.