Coronavirus and home loan refinancing
The COVID-19 pandemic and looming recession is actually a wise time to look at refinancing your mortgage. Here's what you need to know.
Anything you can do to save money right now will protect you from the worst economic effects of coronavirus. If you have a mortgage, refinancing (which means switching) to a new, better mortgage could save you a lot of money and help you get your biggest debt under control.
Here are three reasons to think about refinancing now and some tips on how to do it in the middle of a pandemic.
Rates have never been lower
It's simple: a lower interest rate means lower repayments. The Reserve Bank has lowered the official cash rate five times since June 2019, including two cuts in March 2020. This has driven interest rates on variable rate loans down to historically low levels.
Fixed rate loans are also incredibly low now, with new offers from some lenders going as low as 2.19%.
In short, there has never been a better time to refinance your mortgage.
Coronavirus and its economic effects are a big driver behind these lower rates, but even if the pandemic ended tomorrow refinancing still makes sense.
Here's an example. Let's say you haven't looked at your mortgage for a while and your interest rate is 3.49%. This was the lowest you could find in March 2019. Fast forward to March 2020 and you can find variable rates as low as 2.49%. That's a huge difference.
Scenario: how to refinance and save $3,228
- Loan amount: $500,000
- Loan term: 30 years
- Interest rate: 3.49%
- Monthly repayment = $2,242
- Loan amount: $500,000
- Loan term: 30 years
- Interest rate: 2.49%
- Monthly repayment = $1,973
Your monthly saving by refinancing in this scenario is $269, or $3,228 a year. That's money you can save or even use as extra repayments to pay off your loan faster (or put it into an offset account for the same effect).
An offset account will save you money and act as a buffer
Economic uncertainty and growing unemployment are major effects of the coronavirus pandemic, but your home loan could be one way you protect yourself financially.
Does your current home loan have an offset account? If so, you're already in a good position. If not, consider switching to a loan that does have one.
An offset account allows you to save money like a normal savings account, but every dollar saved in the account temporarily offsets your loan principal. If your outstanding loan balance is $200,000 but you put $10,000 in your offset account, your lender will charge interest based on the offset amount, or $190,000.
So you pay less interest over time. But if you need money suddenly, because your income has fallen or you've lost your job in a recession, you can use the offset account savings as needed to cover mortgage repayments or other expenses.
If you are fortunate enough to have savings, putting it into an offset account lets you save, pay less interest and still access cash when you need it.
It could be time to rethink your strategy
Coronavirus is wreaking economic destruction. Now more than ever, it's vital that you look at your mortgage, your home and your property strategy. This is true for everyone but especially for investors.
Many borrowers opt for interest-only loans. This lowers their loan costs in the short term and allows them to write off interest costs on tax while collecting rent and anticipating capital growth as the property market booms.
But with the coronavirus shutting many things down, it looks like property prices will drop for at least a while. If you're in this situation then refinancing to a principal and interest loan will help you pay off your actual debt and own more of your property. This acts as a buffer if prices drop heavily or you're unable to find a tenant.
This is just one example, and even in this situation you might judge that the interest-only option is still better for you. But now is the perfect time to take stock, read up on the market and make sure your mortgage matches your property strategy.
How to compare, apply and switch
Refinancing requires a whole new home loan application. There's paperwork involved and lots of documents to sign. It's at least a few hours' work but the savings are well worth it. Here are the basic steps to refinance:
- Check your current rate and start comparing home loan options to find better products.
- Check your loan-to-value ratio. You can't really refinance unless you own at least 20% of your property's current value. If your deposit was under 20% and you haven't paid off much of the loan then switching means paying lenders mortgage insurance (even if you paid it already). Refinancing during the coronavirus pandemic could make this trickier. You might have less than a 20% deposit if your property is worth less now.
- Find a mortgage that suits you and submit an enquiry. From here your lender will get in touch and help you through the application process. Alternatively, chat to a mortgage broker and they will help you find and apply for a loan.
- Gather your documents and submit your application. You'll need documents that prove your identity, plus information about your bank accounts, assets and any other debts you have. The lender will look closely at your spending too, so minimise big, luxury purchases in the few months before you apply.
- If your application is approved then your new lender will take over your loan and take care of the rest. You will need to complete a discharge form to leave your old mortgage.
Online home loan applications during coronavirus self-quarantine
Getting a mortgage requires a lot of face-to-face contact with brokers, lending specialists at bank branches and a conveyancer. But personal contact is very hard to do when self-isolation is in effect.
Going with an online lender makes a lot of sense during coronavirus. With these lenders you can input almost all your details online and get support by phone and email. They often have the cheapest rates on the market too.
However, most lenders and brokers are abiding by physical distancing guidelines and have strong phone and online support as well. But keep in mind that even with the most tech-savvy digital lenders, you'll still need to physically print and sign some forms and have them witnessed. You may need someone to come to your house and verify your identity. These processes are all harder to complete thanks to coronavirus.
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