Monday, 13 April 2015

Refinancing your mortgage can save you THOUSANDS

Home loans are a funny thing.  They are probably the biggest liability that most of us have and we research them to death when we actually get them but once they are set in place most of us fall into the pattern of paying them off as fast as we can without thinking about whether we can get a better deal.

Sometimes the deal we are on is so good that we want to hold onto it for as long as possible.  However when competition heats up between banks in the home loan market (as is currently happening in the Australian market) you can often save a lot of money by renegotiating your home loan or moving to a different provider altogether.

How a great deal when refinancing your mortgage

Getting a great deal when refinancing your mortgage is basically being able to do 3 things:
  1. Know exactly what you want and need from your mortgage;
  2. Knowing everything you are currently paying for your mortgage and all the benefits you are getting; and
  3. Leveraging the best offers in the market with the financial institution you want to deal with

Step 1: Know exactly what you want and need from a mortgage

This is the most important step and when you are refinancing your mortgage it is actually much easier than when you are going to buy your first house.  When you go to buy your first house it is hard to know what you want and need.  When you have had a mortgage for a few years you pretty much know what you want and need.

As an example here is what I want and need from a mortgage:
  • It must be cheap.  I don't want to be paying a dollar more than I need to.  This includes things like account fees, package fees and set up fees that we tend to ignore after we've paid them.
  • It must have an offset account.  For tax reasons my investment property needs to have a 100% offset account.  Some people don't require it but it is something that is really important to me
  • It must offer an interest only loan.  Again for tax reasons I don't want to be paying off the principle component of my loan.  The offset account has me saving tax on any excess cash I save but I don't want to be paying off the loan
  • Internet banking needs to be seamless.  A lot of credit unions offer really good deals but their internet platforms really suck.  I only really bank over the internet and I do internet transfers constantly.  I need a really slick technology platform if I'm going to bank with them.
Everyone's requirements are different. Some people require a redraw facility while others don't care about internet banking.  Work out what is important to you and what you want as your step number 1.

Step 2: Know exactly what you are currently paying and the benefits that you receive 

Knowing what you are paying and the benefits you receive will allow you to work out whether you are getting a good deal when you refinance your loan.  Some things you should look at include:
  • The interest rate you currently paying.  This should be incredibly hard to find and is one of the most important points to keep in mind when you are comparing loans
  • What fees you are paying (including your package fees).  Make sure you include all the fees associate with your loan including any annual package fee associated with the loan
  • Do you get anything for free for having your home loan with the bank? Many banks will offer a free credit card or free transaction account if you have your home loan with them.  Work out what you are getting for free before you start comparing other accounts.
After you know exactly what you want and what you are paying it is time to start searching for better deals!

Step 3: Start hunting for deals and playing banks off against each other

The great thing about competitive banking markets is that banks are really eager to steal clients off other banks and they will almost always equal offers that other banks are offering.  Banks all essentially offer the same services - money.  They don't really do things differently and therefore you have the power when it comes to negotiating the price.  The problem you have is that you need to do your research so you know what a good deal is.

What you need to do is:
  1. Find a bank that is offering a great deal (even if you don't actually want to bank with them)
    • Sometimes the banks offering incredibly good deals are not actually the banks that you want to bank with (it may be that they are too small or you have all your other financial dealings with your regular bank)
    • This doesn't matter - all you are doing is research
    • For example I was recently researching and noticed that Bank of Queensland had an amazing home loan deal (4.62% variable rate at the time of writing with a full offset account and interest only available)
    • The problem is that I don't really want to bank with them because they are too small and don't really have the tech platform that I'm looking for
  2. Then find a bank that you are happy to deal with and see if they have a similar mortgage product
    • If you are looking for something fairly vanilla (like I am) this shouldn't be a problem.
    • The biggest issue is that most of the banks are more expensive than the great deal you found
    • Just a note - don't look at the standard variable rate (SVR) that the banks offer.  They will always give you a discount off this rate.  At the moment the common discount for a home loan my size is around 80bp (or 0.8%)...however the Bank of Queensland home loan is actually 1% cheaper than the SVR of the banks I would be happy to deal with...this 0.2% makes a difference over the life of your loan
  3. Take all your documentation to your existing bank or the bank that you are looking to move to and negotiate for the better rate
    • If you have all your ducks lined up then it should be fairly easy to get your existing bank to come down to the good deal that you have found or very close to that deal anyway
    • Make sure you understand all the fees that the good deal has involved in it because you don't want your bank pointing all that stuff out to you
    • If your bank shows you things that they include that the other doesn't and this isn't stuff that you need then tell them this.  Tell them that this extra stuff has no value to you and you just want the better deal.
If you do all of the above you will be amazed at what will be offered to you.  If the banking sector has gotten more competitive since you put your loan in place then you may find that you are paying significantly less by doing this refinancing.

For example when I took out my home loan the discounts to the SVR being offered were significantly less than they are now.  As a result I am currently paying an interest rate of 4.96% on my home loan.  Negotiating down to 4.62% will save me 0.34% p.a.  This may not seem like a lot but on a $350,000 loan this is ~$1,200 per year in savings...I've done a lot more to save less money.

So if your mortgage is starting to get a bit stale this is something that you should consider.  By the way don't forget to consider any break fees that you may have in your mortgage.  These can really sting and can take the benefit out of refinancing.

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