Refinancing, when does it make sense?

Refinancing, when does it make sense?

by | Aug 16, 2022 | Mortgage Broking (Loans)

In June 2022, in seasonally adjusted terms, the value of lender to lender refinancing for owner-occupier housing rose 9.7% to a new record high of $12.7 billion. It was 24.6% higher compared to the year before. With rising variable rates and the maturity of historically low fixed rates being meaningful contributors to household affordability, more Australians are assessing their current loan to ensure they are not paying more than they need to. So, what do you need to consider before refinancing your own loan?


The benefits of refinancing

 

1. Getting a better interest rate

The first task before refinancing is to contact your current lender and request the best rate they can offer. Most lenders have a ‘retention rate’ aimed at keeping your business but is generally not as competitive as rates designed to attract new borrowers. From there, you can accurately compare the rates on offer elsewhere and it may well be that your current lender is still the best place for you.

It’s important to note that the rates widely advertised are generally available to a limited niche of borrower types and may not necessarily be applicable to your personal circumstances and objectives. A good mortgage broker will be able to help find the most appropriate loan and rate.

2. Reducing your minimum monthly repayments

Borrowers often solely associate a reduced rate with reducing their monthly repayments yet in many cases extending the term of the loan, usually back to 30 years, contributes to most of the reduction. It is important to recognize that the loan will therefore take longer to pay down without making extra payments in addition to the minimum. Alternatively, you can choose a shorter loan term if you feel you are comfortably able to afford the extra repayments.

3. Consolidating your debt

Often, for example, credit card, automotive finance or ATO debt is charged at a much higher interest rate than that of your home loan. Refinancing provides an opportunity to consolidate this debt into one cost-effective monthly repayment.

4. Accessing the equity in your property

If you have available equity and can service the additional repayments, refinancing can provide an opportune time to borrow additional funds for non-structural home renovations, to go on a holiday or even provide the deposit to purchase a new investment property.

5. Other circumstantial benefits

This can include benefits such as removing a guarantor or changing lenders after fixing past credit issues.

The cost of refinancing

Refinancing follows a similar application process to that of a new home loan so therefore will require an investment of time and effort. You must provide the lender, or your mortgage broker, with a number of supporting documents to enable the assessment of your application. Once approved, you are required to discharge your current mortgage and update items such as your building insurance policy to reflect the new lender’s details. Lastly, you will need to set up and familiarise yourself with a new online access and update any existing direct debits. A good mortgage broker can help you with the specifics and timing of these administrative tasks.

The benefits of a reduced rate can often be absorbed by the costs of refinancing. These fees may include, but are not limited to the following:

    • Loan application fee: Charge for applying with a new lender.
    • Settlement fee: The new lender may charge a fee to cover the legal costs of issuing your new mortgage.
    • Discharge fee: A discharge fee of around $150 to $400 is usually charged by the current lender in order to release you from the mortgage.
    • Break costs: This may be applicable if you are on a fixed rate and wish to refinance before the term expires. The fee is calculated based on the set borrowing costs of the lender as well as factors such as time to maturity. It’s important to gain a break cost estimate before deciding to refinance.
    • Government fees to register and transfer the property: The applicable state’s Land Titles Office will charge a fee to update the registration of your mortgage on the property title record.
    • Ongoing fees depending on the lender, and loan, you choose: These charges could include monthly account keeping fees, annual package fees or even fees for accessing your additional repayments.
    • Lenders Mortgage Insurance (LMI): A one-off fee only applies if you borrow more than 80% of the value of your property.


Is it worth it?

The ultimate decision on whether to refinance clearly comes down to your personal circumstances. If you are refinancing for a better rate it’s imperative to consider the potential interest saved in relation to the cost of refinancing. This is largely influenced by the reduction in rate and the size of your loan. Let’s consider an example in the following table:

Loan balance Reduction Maximum interest saved per annum Cost of refinancing
$150,000 0.3% p.a. $150,000 * 0.3% = $450 $1,000
$1,000,000 0.3% p.a. $1,000,000 * 0.3% = $3,000 $1,000

 

Clearly, the second example makes financial sense however the benefits of refinancing a $150,000 loan will not be realised for 2-3 years. In this case, other factors need to be considered such as whether you intend to pay down the loan ahead of time or if you’re refinancing for other objectives than simply a better rate.

Lenders looking to attract new customers often offer financial incentives to refinance in the form of cash-back offers. These range from between $1,500 and $5,000 and are cash payments made directly to the borrower to assist with the cost of refinancing. In the above $150,000 example, a lender with the same terms, however offering a $1,500 cash back, could significantly influence your decision.

Each cashback offer has specific and varying qualifying criteria and it’s important to ensure you meet eligibility. At the risk of sounding like a broken record, a good mortgage broker will be familiar with the current offers and eligibility to help you with a cost-benefit analysis. 

If you’d like to discuss your specific circumstances, or simply interested in what rates are available, please do get in touch.

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To fix or not to fix

To fix or not to fix

by | May 17, 2022 | Mortgage Broking (Loans)

The variable versus fixed mortgage rate decision will affect a homeowner for years to come and could be the difference in thousands of dollars of accrued interest. 

At its May meeting, the Reserve Bank of Australia acted to curb soaring inflation by raising the official cash rate by 0.25%. With Governor Lowe warning that this is expected to be the first of many rate hikes over the next 12-18 months, many are wondering if they should fix their home loan to safeguard against rising rates. The right answer depends on your unique situation and tolerance for risk. 

Let’s start by looking at the advantages and disadvantages of each.

Variable rate loans

Advantages
  • The main advantage is flexibility.
  • Unlimited extra repayments which will help you pay your loan off sooner.
  • It takes advantage when interest rates are decreasing by lowering interest repayments.
  • Allows you to refinance or restructure your loan at any time, for example, by accessing excess equity for renovations.
  • Variable home loans generally come with more features such as a redraw facility or offset account.
Disadvantages
  • When interest rates rise, so too do your repayments.
  • As interest rates can change at any stage you lack a level of certainty over what your repayments will be in the future. This can make detailed budgeting quite challenging.

Fixed rate loans

Advantages
  • The main advantage is payment certainty, allowing you to budget your repayments for the foreseeable future. This leads to a greater sense of financial security.
  • Your interest repayments will be lower if, during the term, the variable rises above the fixed rate.
Disadvantages
  • Most fixed rates limit extra repayments to around $5,000 per year therefore if you benefit from a lump sum of cash, like an inheritance or bonus, you cannot place this directly onto the loan without penalty.
  • You do not benefit when interest rates go down during the term of the fixed loan.
  • There are penalties for breaking a fixed rate before maturity which makes restructuring or refinancing to another lender much more expensive. These penalties also apply if you sell your property within the fixed rate term.
  • Fixed rates generally do not come with additional features such as a redraw facility or an offset account.

As you can see, there is a lot more to consider than simply a bet on where interest rates are heading.

After considering these characteristics, if the certainty of fixed rate repayments is still appealing you should then consider whether you will likely be better off with the fixed rates on offer.

A common misconception is that if the variable interest rate rises higher than the fixed rate over the term of the loan then you will pay less interest. Of course, there are periods during the term when the variable rate will be lower so you must instead consider the average rate over the term. Take an example where a rate was fixed 1% above the current variable rate for a period of 2 years. After 1 year the variable rate had steadily risen to meet the fixed. To break even, the variable would need to continue to rise another 1% (approx.) over the final year of the term. When calculating the exact breakeven point, you must also consider the timing of the rate rises and that the loan balance may steadily decrease over the term.

The calculations in the table above are based on a 30 year $800,000 loan with monthly principal and interest repayments.

Hedge your bets

Often borrowers are drawn towards the certainty of fixed repayments but do not want the additional payment restrictions that come with it. By splitting the loan, you can essentially enjoy the benefits of both. To calculate the variable split, you should consider how many extra repayments you are likely to make over the term of the fixed rate as well as how much your balance will reduce by your regular payments. A good mortgage broker can help you with this calculation. You may also consider an even split if you are undecided which rate will work best for you.

 

If you’d like to discuss your specific circumstances, or simply interested in what fixed rates are available, please do get in touch.

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4 new super contribution opportunities

4 new super contribution opportunities

by | Mar 21, 2022 | Financial Planning, Wealth Management

For older Australians, it has been more difficult to build up their superannuation balances. Once you are 67 years of age, there is a requirement to meet a ‘work test’ in order to continue to contribute. This work test forced you to work 40 hours over 30 consecutive days in order for you to make a lump sum contribution (known as a non-concessional contribution) of up to $110,000.

With these restrictions, it was important to carefully plan your superannuation strategy from a younger age.

However, the Federal Government sought to amend these restrictions.

May 2021 Federal Budget

In the May 2021 Federal Budget, the government announced a number of initiatives to assist Australians in building up their superannuation.

These included:

  • Removal of $450 monthly income threshold for super contributions.
  • Reduction in age to 60 for the downsizer contributions.
  • Removal of the work test for people aged 67-74.

It also increased the withdrawal limit for First Home Super Saver Scheme (FHSS).

Legislation has now passed both houses of parliament and will apply form 1 July 2022.

4 new super contribution opportunities

Removal of $450 monthly income threshold

The government has finally scrapped the $450 superannuation guarantee threshold. This should make approximately 300,000 people eligible for super contributions from 1 July 2022.

Lower Age for ‘Downsizer’ contributions

In selling the family home, couples have the ability to contribute $300,000 each into superannuation as a personal contribution. The age for this contribution was 65, however, it has been lowered to 60. As of May 2021, 22,000 Australians have taken advantage of this opportunity to boost their retirement balances. It should also be noted that these contributions are not restricted by the $1.7m transfer balance cap.

The lowering of age to 60 will come into effect from 1 July 2022.

First Home Super Save increased capacity

This is a great opportunity for couples who are saving for their first home. This scheme allows people to make voluntary contributions to superannuation to save for this purchase. The current caps on these contributions are $15,000 a year and $30,000 in total.

However, it has been passed to allow voluntary contributions (both post tax or through salary sacrifice) up to $50,000 in total.

So a couple will have access to $100,000. It’s important to remember compulsory employer contributions are excluded. Only voluntary contributions may be withdrawn.

This will commence from 1 July 2022.

Removal of work test for 67-74 year olds

The most significant superannuation opportunity announced in the May 2021 Federal Budget was to allow 67-74 year olds to make a personal contribution to superannuation without meeting the current work test. This has now been passed and will come into affect on 1 July 2022.

However, not only will older Australians be able to make a personal contribution of $110,000 pa, but they will also be able to take advantage of the bring forward rule and contribute $330,000 as a lump sum.

What you need to know about property investing in your self-managed super fund (SMSF)

What you need to know about property investing in your self-managed super fund (SMSF)

by | Sep 13, 2021 | Financial Planning, Investments, Property Loans

“We want to eventually retire to the coast so we will buy a property in our self-managed superfund and rent it out in the meantime. The value of the property will rise over time and when we’re ready to retire we’ll just move in.” 

We’ve heard this statement many times, but if only it was so easy. At a time when property markets are buoyant and interest rates so low, many people are considering property investment within their SMSF but the laws around what you can do, and can’t do, with the property are complex. 

Investing in residential property

Firstly, residential property purchased through an SMSF cannot be lived in or rented by you, any other trustee or anyone related to the trustees – no matter how distant the relationship. Buying a coastal property in your SMSF and moving in when you retire is therefore not allowed. When you retire you must first purchase the property from the SMSF, perhaps from the money you receive from selling your city residence. This is just like buying a regular property except you won’t have to deal with negotiations. The transaction must take place at a fair market value, based on objective and verifiable data, and will involve additional costs such as stamp duty and legal.

Investing in commercial property

Rules regarding related parties that apply to residential properties do not apply to commercial properties. They therefore can be sold to an SMSF by its members, as well as being leased to SMSF trustees or an individual or business related to them.

This exception makes SMSF commercial properties appealing to many small business owners such as barristers to buy their chambers or manufacturers who can purchase a warehouse/factory. This allows the business to pay rent to their superfund rather than ‘dead money’ to a landlord. Again, it’s important the lease agreement is at market rate and must be paid promptly and in full at each due date. 

Regardless of whether it’s a residential or commercial property, the investment must also satisfy the overarching function of the SMSF, which is to provide retirement benefits for its members (a concept known as the sole purpose test). You must consider the yield or potential capital appreciation when selecting the property and if neither makes good investment sense, you should reconsider.

The loan

Lending through your SMSF must be done by a limited recourse borrowing agreement (LRBA). The property must be owned by a separate ‘bare’ trust that sits outside of the SMSF structure and has its own trustee. All the property-related income and expenses are then made through the superfund’s bank account. These loans are specifically designed to ‘limit the recourse’ so that if the terms of the loan are breached the lender can only access the property and other superfund assets are protected. 

Given the unique characteristics of the loan, SMSF loans generally attract significant application fees and higher rates than standard home loans. The lending criteria are also much stricter and can involve things such as reduced loan to value ratios (LVR), shortened loan terms resulting in higher repayments, and often borrowers require a minimum percentage of liquid superfund assets available to make loan repayments if needed. There are also additional legal costs associated with the setup and ongoing compliance of both the SMSF and bare trust structure. These costs must be factored in to decide if purchasing in your SMSF is the right option for you.

Renovating

The idea of renovating a residential property within an SMSF to improve capital value is also more complicated than it first appears. Whilst general maintenance and repairs can be made, any significant renovations must be funded by available cash already held within the superfund and not by the loan or borrowed money. Even if funds are available, you are not allowed to make significant changes to the original property that was purchased using the limited recourse borrowing arrangement. Renovations that substantially change the asset will require a new LRBA.

Given the right opportunity, there is no doubt that buying property in your SMSF can be an excellent long-term strategy but there are clear complexities. The considerations presented in this article are by no means exhaustive and investing through your SMSF should always be done in consultation with your financial adviser and an experienced mortgage broker. 

Contact us today to discuss whether buying a property in your SMSF could work for you.

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What you need to know from the 2021-22 Federal Budget

What you need to know from the 2021-22 Federal Budget

by | May 12, 2021 | Financial Planning, Wealth Management

As Scott Morrison kept reminding us this morning, ‘we are fighting the pandemic’ and so the Federal Budget focuses on key spending to drive Australia’s economic recovery.

This is a Budget promoting economic growth and employment. While you will have those who continue to have major concerns over government debt and the continued spending, could it be that we are seeing a ‘new’ way of thinking when it comes to debt? My colleague, James Weir, wrote a paper explaining this with Modern Monetary Theory (“MMT”), suggesting maybe the focus on debt is unwarranted?

So here are the simply the main features of the 2021-2022 Budget;

Personal Income Tax

Low and middle income tax offset

This will be extended to 2021-2022 providing a reduction in tax of up to $1,080 to low and middle income earners.

Superannuation

Federal Budget - Superannuation

Removing the work test

This is actually a significant change. Individuals aged 67 to 74 years will be able to make non-concessional super contributions, or salary sacrifice super contributions without meeting the work test.

However, in order to make personal deductible contributions, you will still need to meet the work test.

Downsizer contributions

The charges announced in the Budget from that article include reducing the eligibility age for 65 to 60 years of age. This scheme allows a one-off contribution of $300,000 per person from the proceeds of the sale of their home.

To learn more about downsizer contributions and how it can work for you check out my blog here.

SMSF residency restrictions

From 1 July 2022, the Government will extend the central control test from 2 years to 5 years and remove the active member test.

Super guarantee threshold

The $450 per month minimum income threshold under which employers are not required to make a super contribution for employees will be removed 1 July 2022.

First Home Buyer Scheme (FHBS)

From 1 July 2022, the Government will increase the amount of voluntary contributions to $50,000 which may be released for the purchase of a first home.

Family Support

Family Home Guarantee

The Government has introduced the Family Home Guarantee to support single parents with dependants buying a home. This is regardless of whether they are a first home buyer or a previous owner-occupier. From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, subject to an individual’s ability to service a loan.

The Government is also providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Increasing childcare subsidy (CCS)

To ease the cost of childcare and encourage a return to the workforce, from 1 July 2022 the Government proposes to provide a higher level of CCS to families with more than one child under age 6 in childcare. The level of subsidy will increase by an extra 30% to a maximum subsidy of 95% for the second and subsequent children. For example, currently a family may receive a 50% subsidy on childcare costs for each child if family income is between $174,390 and $253,680. Under the proposal, the family would receive a CCS of 50% of costs for their first child and 80% for their second and subsequent children. The annual CCS cap of $10,560 for families earning between $189,390 and $353,660 will also be removed.

Social Security

Pension Loan Scheme

The Government has announced added flexibility by allowing up to two lump sum advances in any 12 month period up to 50% of the annual pension.

The Government will also not claim back any more than the sale price of the house used to guarantee the payment.

Aged Care

The Government has announced a $17.7b investment in aged care reform over the next 5 years which will cover:

  • Additional Home Care Packages
  • Greater access to respite care services
  • A new funding model for residential aged care
  • A new Refundable Accommodation Deposit (RAD) support loan program.

Business Support

COVID Package

The Government will extend until 30 June 2023 the instant write-off of depreciable assets as well as the ability for qualifying companies to claim back tax paid in prior years from 2018-2019 where tax losses occur until the end of the 2022-2023 financial year.