Time to refinance? You may be missing out on savings!
Interest rates and home loans continue to be a hot topic in financial circles. After more than nine months, the cash rate remains at the historic low of 1.50%. But what we’ve seen since the beginning of 2017 is lending institutions moving out of step with the Reserve Bank of Australia (RBA) and increasing rates regardless of cash rate decisions.
What we perhaps need to be aware of is that many Lenders have been setting their interest rates independently of the RBA for several years. There’s just been less focus on this because rates, until now, have been moving downward.
So, does this mean that you can no longer find a better deal for your home loan? Not necessarily. What we’re seeing is that Lenders are now not only managing rates based on whether you’re an investor or owner occupier and whether you want a fixed or variable rate, they’re also considering factors such as the loan to value ratio (LVR) on your lending, whether you’re after interest only or principal and interest repayments and the features you’re looking for in your loan.
So what loan is the right one for YOU?
Well, that all depends on your circumstances. Variable and fixed loans have their advantages and disadvantages so it’s imperative to consider these before making a decision.
Fixed loans provide you with the assurance of regular loan repayments removing immediate exposure to potential increases in interest rates. A number of lenders also allow additional payments (up to a limit) and some may let you redraw on those additional payments during the fixed term.
Variable rates allow ultimate flexibility however they come with the additional exposure to changes in future interest rate changes, which right now we’re seeing are trending toward increases.
Split loans combine features of both variable and fixed loans allowing you to broaden your options and limit the exposure to increases on the full amount financed.
Typically, owner occupiers pay their loan on a principal and interest basis. This means that each repayment you make, covers the interest that has accrued, along with a proportion of the principal debt. The result being the reduction in the amount you owe on the debt each month and therefore a reduction in the amount of interest that is accrued each month also. Some owner occupiers may seek an interest only loan, but lender’s usually require you to provide a reasonable justification.
Investors are more partial to Interest Only. With this type of loan, the repayments they make each month cover just the interest component, leaving the principal debt owed unchanged. This loan structure is advantageous for investors because it allows them to maximise their tax savings and minimise the monthly outgoings on the loan, therefore allowing them to more easily cover the holding cost of the property from the rent they receive.
With the focus of Regulators on responsible lending and the pressure on the industry to assist in taking some heat out of what many commentators regard to be an overheated property market, Interest Only loans are now becoming more difficult to obtain. Some Lenders no longer offer interest only to owner occupiers and are more tightly controlling criteria for investors to be able to access these types of loans.
Features to consider
It is important not to judge a home loan solely on interest rates. Be aware of other fees including upfront fees and ongoing monthly fees. Just like phone plans, you’re not comparing apples with apples when you look at Lender advertising. We suggest that you speak with a Finance Broker who has access to the range of products across lenders and can compare and advise you on the costs and benefits of extra features, such as an offset account or redraw facility, possibly saving you money.
Other loan features to pay attention to include waiving fees and charges for other accounts held with the Lender (such as monthly transaction fees or annual credit card fees). Make sure extra repayments are not penalised. Some loans, such as fixed loans and some no-frills variable loans, may limit the amount of extra payments you can make to reduce your loan.
How easy is it to switch to another home loan?
Many people end up paying more than they need to by staying with an existing loan or lender because they think it is ‘too hard’ to investigate switching to another option. You should ask yourself whether your existing loan and structure is working for you and assisting in achieving your financial objectives. Can you improve your financial position or relieve some living expense pressure?
We can research alternative products and/or lenders and advise you whether changing products is suitable for your situation, and whether there is an advantage in you switching loans. If so, we help make the process as smooth as possible.
Even with the recent increase in rates from some lenders, if you HAVE NOT reviewed your loan in the last 12 to 18 months then you are more than likely paying more than you need to for your home loan.
It costs nothing for us to double check your situation and may in fact save you hundreds each month.
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Glenyce Barton | Finance and Budget Mentor | Article ©2017 iFind Finance