The 5 Signs It’s Time To Review Your Home Loan
ARTICLE AT A GLANCE
If you have a home or investment loan, you’ll no doubt have heard the advice that you should review it every one to two years. This is generally good advice. It’s the same advice we give to all our clients at NBS Home Loans.
However, it’s essential to keep in mind that one to two years is the absolute longest you should go between reviews, and in many cases, it is worth reviewing your loan sooner than this.
In this article, we look at the top 5 signs that tell you it’s time to review your home loan ASAP, no matter how long it’s been since your last review.
It’s important to know that reviewing your home loan does not always necessarily mean refinancing it to another lender, as there are pros and cons to be considered for each individual client.
However, regularly reviewing your home loan can help ensure you still have the right home loan for your needs, you stay on a competitive interest rate, and you avoid paying a home loan loyalty tax, which can happen when lenders charge long-term customers a higher interest rate than they charge to brand new customers.
SIGN #1: IT’S TIME TO REVIEW YOUR HOME LOAN IF YOUR CIRCUMSTANCES HAVE CHANGED
Interest rates are only one piece of the puzzle when selecting a home loan.
When you approach an experienced finance broker such as NBS Home Loans about applying for a home loan, we will work with you to weigh a range of factors to find a loan that is a great fit for your circumstances and needs.
The thing is… circumstances can change.
And if you consider that most people take out a 30-year mortgage, circumstances will likely change A LOT over that time frame.
That’s why it’s important to review your home loan regularly, particularly when your circumstances change, to ensure it is still a good fit for your needs.
What Are Some Critical Signs That Your Circumstances Have Changed and You Need to Review Your Home Loan?
Everyone’s situation is different, but some of the most common situations are listed below.
Some changes may relate to the loan, while others relate to your personal or financial situation.
- You have incurred other debt
- You have received a large sum of money
- You need additional funds for renovations, to purchase another property, or for another purpose
- You intend to sell your property, perhaps to upsize or downsize
- You intend to change how the property is used (e.g. you want to rent out your primary residence and move elsewhere)
- You need features that your current loan or lender doesn’t offer
- Your financial situation has changed (e.g. a new job or loss of income)
What Are Your Options To Review Your Home Loan If Your Circumstances Have Changed?
If your circumstances have changed, it’s essential to talk to a finance broker such as NBS Home Loans to review your loan. Your options will depend on the type of change of circumstances you’ve experienced and your current needs.
For example, if you require features that your current lender does not offer, consider a refinance to a lender that can provide these features.
In other cases, a change to the structure of the existing loan, the loan term, or the repayment type (for example, changing from principal and interest repayments to interest-only repayments or vice versa) may be suitable options.
In cases where you’ve incurred other debt, or your financial situation has changed, repayment pauses, debt consolidation, or loan increases/decreases may all be considered depending on your unique situation.
It is essential to talk to your finance broker as soon as possible to understand your options and the courses of action available to meet your changing needs.
SIGN #2: IT’S TIME TO REVIEW YOUR HOME LOAN IF YOUR PROPERTY VALUE HAS INCREASED OR LOAN SIZE HAS DECREASED
If you don’t intend on selling your property any time soon, you may not have given much thought to how much your property is currently worth compared to the size of your home loan.
However, it’s essential to know that your property’s value and the amount you still owe on the property can impact your interest rate.
This is where the concept of LVR comes into play.
What Is LVR and Why Does It Matter When You Review Your Home Loan?
LVR stands for Loan to Value Ratio. LVR is the amount of your loan divided by the value of your property.
If your lender values your property at $500,000, and you have a home loan of $400,000, the loan amount is 80 per cent of the property value. Your LVR (loan to value ratio) is, therefore, 80%.
Most lenders like your LVR to be under 80%, and most will charge you additional costs, such as lender’s mortgage insurance (LMI), if it exceeds this LVR (loan to value ratio).
What Is Equity In Regards To Your Home Loan?
Equity is the value of your property minus the loan amount you still owe.
In the example above, you would have $100,000 of equity in your property.
How Does LVR Impact Your Interest Rate On Your Home Loan?
As a general rule, higher LVRs attract higher interest rates, while lower LVRs attract lower interest rates.
The difference between a low and high LVR loan sometimes be as much as half a per cent (0.5%) with the same lender.
This may not sound like much, but it can add up to thousands of dollars in interest over the life of a loan.
Why Is There a Difference in Home Loan and Investment Loan Interest Rates for Low and High LVRs?
The difference in Interest Rates is because higher LVRs are considered riskier by lenders.
This is because borrowers with little equity in their homes (i.e. they have a high LVR) have far fewer options if they find themselves in financial hardship.
It can be challenging to refinance a property with a very high LVR, which means borrowers may be stuck with their existing lender even if their interest rate becomes unaffordable.
In addition, if property values fall by even a tiny amount, the outstanding loan amount may be significantly more than the total value of the property. If the property is sold, there may not be enough money to repay the loan.
On the other hand, low LVRs usually carry much less risk for both borrowers and lenders. Suppose a borrower with a low LVR and a large amount of equity finds themselves in financial hardship.
In that case, they are likely to be able to sell the property for a much larger sum than they owe on their home loan, allowing them to pay off their loan and free up some additional cash.
What Happens When Your LVR Changes?
When you apply for a new home loan or investment loan, lower LVRs tend to attract lower interest rates to reflect the lower level of risk to the lender. This means someone borrowing at a 50% LVR is likely to be paying much less than someone borrowing at a 90% LVR.
However, what happens if you borrowed at 90%, but you’ve now paid off a large portion of your loan, or your property value has increased, and you now only owe 50% of the value of your property?
It’s important to know that your existing lender is unlikely to automatically lower your rate because you now have a lower LVR.
In this situation, you could be paying a significantly higher interest rate than you need to because your rate is set based on the loan’s original value relative to the original property value.
What Should You Do If Your LVR Is Lower Now Than It Was When You Took Out Your Home Loan?
In this case, you should review your home loan as soon as possible.
At NBS Home Loans, we can help you negotiate a better deal with your current lender based on your current LVR.
We can also compare a range of interest rates from across the market to determine whether your current lender is offering a competitive rate or whether refinancing to another lender may be a suitable option in your circumstances.
SIGN #3: IT’S TIME TO REVIEW YOUR HOME LOAN IF YOUR FIXED-RATE PERIOD IS ABOUT TO EXPIRE
At the height of the COVID pandemic in November 2020, the cash rate hit a record low of 0.10%, where it stayed until May 2022.
As the cash rate heavily influences the home loan and investment loan interest rates charged by lenders, many borrowers could lock in never-before-seen fixed rates during this period.
In fact, a number of our clients were able to fix their home loan at 1.79% for 4 years, meaning their interest rate will stay locked in at this rate until late 2024 to early 2025, depending on when their fixed rate period began.
However, most borrowers chose to fix their home loans for shorter terms of between 2 and 3 years. As a result, many fixed-rate loan terms are now ending and rolling onto the current variable rate.
Unfortunately, an extensive series of rate rises in 2022 means the current variable rate is likely to be much higher than the fixed rate these borrowers were paying, which means that many borrowers will experience a massive increase in their loan repayments at the end of their fixed rate period.
What is the Difference Between Variable and Fixed-Rate Home Loans?
Variable-rate loans usually offer the greatest flexibility when making extra repayments or switching loans. However, you’ll need to be prepared for your repayments to increase if the interest rate continues to grow.
On the other hand, the interest on a fixed-rate home loan will remain the same for a set time period of your choice (usually between 1 and 5 years).
On the plus side, this can be easier for budgeting as your repayments will stay the same, and you are protected from future rate rises during the fixed period.
However, there are generally restrictions on making extra loan repayments, accessing redraw or offset options, or switching your loan during the fixed-rate period.
Fixing your home loan interest rate also means you will miss out on any benefit if interest rates go down during the fixed-term period.
It is possible with many lenders to fix only part of your loan while keeping the rest at a variable rate. This is called a split loan.
What Are The Current Interest Rates for Home Loans?
Borrowers who secured a fixed rate loan during periods of record low rates are in for an enormous shock to the system when their fixed rate period ends.
Since May 2022, the cash rate has climbed steeply from 0.10% to 3.10% as of January 2023.
Home loan interest rates have consequently increased by around 3%, meaning home loan repayments have increased significantly to cover the extra interest payable.
In addition, further rate rises are widely anticipated as we move into 2023.
As of 17 January 2023, variable rate owner-occupied loans start at 4.46%pa (comparison rate 4.51%pa), with most lenders sitting in the high 4% to mid 5% range.
Fixed rates are generally higher than variable rates at the time of writing.
Owner-occupied fixed rates are available from 4.89 %pa (comparison rate 4.83% pa), with most lenders sitting in the low to high 5% range for 1 to 3-year terms and the high 5% to mid-6 % range for 4 to 5-year terms.
Investment loans are generally priced around 0.2 %pa higher than owner-occupied rates.
What Happens When Your Fixed-Rate Period Ends On Your Home Loan?
When your fixed-rate ends, your loan generally automatically reverts to the standard variable rate offered by your lender at the time unless you make other arrangements.
The standard variable rate offered by your lender might be higher, lower, or the same as your fixed rate depending on how rates have changed during the fixed period. In the current economic climate of rising interest rates, most borrowers will find the current variable rate is much higher than their previous fixed rate.
What Should You Do If Your Fixed-Rate Period Is Ending On Your Home Loan?
At NBS Home Loans, we contact all clients in the lead-up to the end of their fixed-rate period to discuss their options and help ensure that they stay on a sharp rate in future.
At the end of the fixed rate period, you can choose to:
- allow the loan to convert to the current variable rate (which is the default option if you do not take any other action);
- lock it in for a further fixed period at the current fixed rate offered by your lender (keeping in mind that fixed rates have also increased significantly, so it is likely your new fixed rate will be much higher than your previous fixed rate);
- or split it into a combination of fixed and variable portions.
For many borrowers coming off a fixed-rate loan, higher interest rates are an unfortunate inevitability.
However, this does not mean you must always accept your lender’s standard variable rate offer. In many cases, we can negotiate a discount on the interest rate with your existing lender on your behalf.
Suppose your lender is unable to offer a competitive rate. In that case, we can compare various options on offer to consider whether refinancing to another lender may be a good option for you and your circumstances.
In either case, it is vitally important to review your home loan with us at least two months before your fixed-rate period ends so we can help you consider your options and next steps.
SIGN #4: IT’S TIME TO REVIEW YOUR HOME LOAN IF YOU ARE NO LONGER HAPPY WITH YOUR CURRENT LENDER
When you first applied for your home loan, your current lender may have been an excellent fit.
Perhaps they offered a great rate with all the features you needed at the time, or your local branch was always on point with their friendly and fast service.
But something has changed, and you’re no longer feeling the love.
It’s normal for your needs and priorities to shift during the life of your loan, and this can sometimes mean your existing lender is just not the right fit for you anymore.
Perhaps your current lender no longer offers the essential services you need, or their interest rate and fees aren’t so competitive these days and they are unwilling to negotiate.
How Do You Know You Have A Good Interest Rate For Your Home Loan?
Banks love to advertise their interest rates, so most borrowers can get a reasonably good sense of whether their interest rate is still competitive by checking what other lenders offer.
However, interest rates only tell part of the story.
It is not always immediately apparent whether the loans you’re comparing are similar types of home loans, what sort of fees are involved, or whether or not you even qualify for the advertised rate (e.g. some rates may only be available on specific loan amounts or to workers in specific fields of employment).
To determine whether your rate is still competitive, your best bet is to talk to an experienced finance broker with access to many lenders, like NBS Home Loans.
A good finance broker can compare many different types of loans from across a vast range of lenders to give you a clear picture of where your home loan rate sits in the market. They can also help you weigh up considerations other than interest rate, such as the costs and features of various home loans, to help you fully understand your options.
Suppose the interest rate is your biggest concern with your existing lender. In many cases a finance broker can assist you to negotiate an interest rate discount on your current loan.
This may be enough for you to decide to stay with your current lender for the time being.
What If Your Concern Isn’t About Your Interest Rate?
Sometimes your interest rate is not necessarily the problem.
Although finance brokers specialise in loans, if a particular service is essential to you (such as in-branch banking, 100% offset accounts, EFTPOS cash out, or fee-free foreign transactions), an experienced finance broker can also help you identify which lenders offer these services.
What Should You Do If You Are Considering Changing To Another Lender For Your Home Loan?
If you have raised your concerns with your current lender and are unhappy with the outcome, it’s time to review your home loan with NBS Home Loans to assess your options.
NBS Home Loans will help you consider many factors in deciding whether a refinance is the right option, including the costs and benefits of changing lenders.
It’s important to understand that refinancing may not always be a suitable option, such as where you are not currently working and are unable to show evidence of income to a new lender or where your LVR (Loan-To-Value-Ratio) is over 80%, or where you would be required to pay additional LMI (Lenders Mortgage Insurance) if you refinanced.
NBS Home Loans will take the time to understand your financial situation fully and needs to determine if refinancing options are available and, if so, whether they are suitable for your circumstances.
SIGN #5: IT’S TIME TO REVIEW YOUR HOME LOAN IF YOU ARE FEELING FINANCIAL STRESS
Rates have been rapidly increasing since May 2022, which has had a massive impact on Aussie homeowners.
In fact, the cash rate has risen by 3% in just 9 months, which is a massive jump over a reasonably short period.
As rates increase, minimum monthly home loan repayments must increase to cover the extra interest accrued on the loan.
Coupled with the rising cost of living, it’s little wonder that many borrowers are feeling stressed about their financial situation and ability to comfortably afford their home loan repayments while maintaining their current standard of living.
What Is Mortgage Stress?
Mortgage Stress generally occurs when a borrower or family struggles to make their home loan repayments.
This can happen because repayments have increased to an uncomfortable level (usually due to rising interest rates), when a borrower has taken on an unmanageable level of debt, or because of other changes to the borrowers’ financial situation (such as a loss of income or unexpected additional expenses).
As a general guide, mortgage stress is most common when more than 30% of a household’s pre-tax income is required to meet mortgage repayment obligations.
However, depending on your circumstances, it can certainly occur at much lower or higher percentages.
What Should You Do If You Are Feeling Financial Stress About Your Home Loan?
If you are experiencing financial stress or anticipate that an upcoming change to your circumstances may cause you financial stress in future, it is absolutely vital to speak with an experienced finance broker like NBS Home Loans as soon as possible to discuss your options.
The earlier you can speak with a financial expert, the more options are likely to be available to you.
The unfortunate truth is that when income has slowed down or dried up, or savings have been depleted, it is less likely that lenders will consider refinances, debt consolidation, or other changes to your borrowing arrangements, so it is essential to be as proactive as possible.
What Options Are Available To Your For Your Home Loan?
Depending on your circumstances and needs, it may be possible to restructure or refinance your home loan, renegotiate your interest rate, or consolidate debt to alleviate some financial stress without needing to sell your property.
In other cases, such as where you are already experiencing financial hardship but want to retain your property if possible, we can help connect you with your lender’s hardship team to discuss making alternative repayment arrangements for your current home loan.
Each lender is well-equipped to discuss hardship options and connect you with resources that may assist you.
The main thing to remember is that it is essential to review your home loan sooner rather than later if this concerns you.
How Long Does It Take To Review Your Home Loan?
As a general rule, you should allow at least one hour for your initial home loan review with your finance broker.
During this conversation, they can check your current loan arrangements and interest rate, gather some preliminary information about your needs and situation to check for any significant changes, provide a high-level comparison of where your current interest rate sits in the market, and determine your next steps.
If your finance broker believes it may be worth trying to negotiate a discount on your existing variable rate, he or she will often be able to do this on your behalf.
Most lenders will advise on the spot whether they are willing to negotiate a new rate, while others have a longer rate-review process which may take up to seven days.
If it is decided by all parties that a refinance might be a good option for you, this process can take quite a bit longer as a refinance is treated as a new loan application.
This means your broker will be required to provide updated disclosure documents, complete a new ‘fact find’ to fully understand your needs and circumstances, and will also need to ask you for updated documentation such as identification, payslips and tax returns in order to complete a new loan application on your behalf.
Once the application has been received by your lender, it can be a matter of days or weeks until your application is assessed and you receive final approval.
Each lender has different turnaround times, and your broker will ensure you are aware of the turnaround time for your chosen lender so you know exactly what to expect.
A refinance to a new lender is generally treated as a new loan application.
For more information about the loan application process please visit our article linked below.
Ready To Review Your Home Loan? WHAT’S NEXT?
If it’s time to review your home loan, NBS Home Loans is here to help.
NBS Home Loans has written a helpful article for Australians on UNDERSTANDING INTEREST RATES, expanding further on our information here: https://www.nbshomeloans.com.au/understanding-interest-rates-in-australia-in-2022/
For an up-to-date overview of the current rates on offer, visit our Facebook page at facebook.com/NBSHomeLoans
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