Smart refinancing strategies for your client’s advice

More and more we are seeing credit and finance strategies complementing this advice and helping clients decrease their debt, make their debt work more effectively and build wealth.

In this article, we provide an overview of some common refinancing opportunities.

Consolidation of debts into one facility

Home loan interest rates are generally the lowest form of interest on any loan in Australia. Credit card interest rates can be as much as four times higher than home loan interest rates, while car loans and personal loans will have higher rates, all of which can prove to be a drain on finances.

As such, consolidating all of these debts into a home loan can potentially allow clients to pay off personal debts and reduce the interest payable on the overall debt. Considerations are:

• Maintaining repayments at the same level to pay off the home loan sooner;
• Using the savings from the reduced repayments for other investments; and
• Structuring the facility to separate the consolidated debt from the original home loan and maintain the original time frame the funds were borrowed for. For example, if a motor vehicle depreciates over five years, aim to have this portion of the debt cleared within that time frame. This will ensure these debts are properly managed while having the benefit of the same interest rate as the mortgage.

Switching to a lower interest rate or more appropriate features

Interest rates change frequently, with lenders adjusting in response to economic influences, RBA rate movements and policy directives from industry bodies such as the Australian Prudential Regulation Authority (APRA). Additionally, second tier and non-bank lenders often offer lower interest rates when the big banks don’t.

As such, one of the major reasons people refinance their home loan is to secure a better rate to reduce their repayments, which can translate into improving their cash flow and saving a considerable amount of money over time. For example, on a $750,000 facility a half-a-per cent reduction in the rate translates into a saving of around $200/month in repayments.

Additionally, refinancing to a lower rate may offer a way to build equity through the savings, as well as take advantage of more competitive terms and flexible features through products that may not have been available when the facility was originally put in place.

Releasing equity

Borrowers tap into the equity in their home for a whole host of reasons including: to use the funds as a deposit on an investment property; home renovations; upgrading their car; to assist with children’s education; or to invest in a business or stocks and shares.

When accessing equity there are many variables to take into account. These include the property’s value, the current loan to value ratio (LVR), the lender’s credit policy and the type of loan structures available.

Two common reasons people access their equity are:

1. Investing in property

Property investment is one of the most popular ways of building wealth in Australia. However, a key challenge is often raising a deposit and a common strategy is to unlock equity in another property to use as a deposit on an investment property.

Accessing this equity will increase repayments on the original property and add the associated repayments from a mortgage on the investment property – as well as the costs to run this. With good planning and the right property, these can potentially be serviced through rental payments.

Key to this planning is obtaining the right finance and undertaking property research. This will help to support the client’s capital growth and yield objectives and give clients a platform to build their wealth over the long run.

2. Accessing equity to renovate or extend your home

Renovating or extending to meet the needs of a growing family or a changing lifestyle is often a better option for some than purchasing an entirely new home. By accessing equity to renovate or extend a home, clients can create the home that exactly meets their needs and perhaps increase the value of their home to offset this cost over time.

Going from low-doc to full-doc

Lenders presently consider low documentation (low-doc) borrowers to be riskier propositions than full documentation (full-doc) borrowers. As such, these ‘high-risk’ loans – while suitable to enable some people to enter the market place – often have higher interest rates attached. As such, low-doc borrowers should evaluate their mortgage and their financial situation on an ongoing basis.

If a low-doc borrower can prove stability in their job and finances, including providing current financial statements and a solid paper trail, they may be able to switch to a full-doc loan to access a lower interest rate or other benefits such as lower ongoing fees or more flexibility.

Important considerations when refinancing include:

• The value of your client’s property. This will determine the equity that can be realised:
• What, if any, fees and costs are associated in changing provider;
• Understanding the potential savings. This can be done by simply calculating the savings from the difference in rates and deducting the costs associated in switching products to see the benefits;
• Other benefits that may not actually be savings, but could include access to new loan features or further cash equity; and
• A client’s equity situation. If a client currently has a loan equating to more than 90 per cent of the value of their property assets – then they may be in or near a negative equity situation. Negative equity is where they owe more than the property is worth. This would become an issue if considering a refinance, which will formalise that loss and clients should steer clear of refinancing if that were the case.

This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article that you need to understand to ensure your personal circumstances are taken into consideration.

Anthony Landahl, managing director, Equilibria Finance

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].