3 things to consider if you have a home loan
For most people, their home is the biggest asset they will own and the loan used to purchase the property, the biggest debt they will carry. They look after and maintain the property but too many don’t bother to monitor and manage their loan once they have the home. Everyone’s personal and financial circumstances evolve, even if they don’t switch properties, so regular reviews of their home or investment loan structure are a must to ensure the loan matches their circumstances. Borrowers should regularly ask themselves and their lender, does my loan structure and rate match my needs and circumstances? If change is needed, in most cases it should be neither costly nor difficult. On the other hand, not reviewing your loan regularly could prove both costly and give you plenty of headaches down the track.
Here are the three main loan features we constantly review.
The Australian Securities and Investments Commission (ASIC) and the banking watchdog the Australian Prudential Regulation Authority (APRA) are now placing huge pressure on lenders to reduce the number of Interest only loans they provide. In response, lenders are using both the carrot and the stick approach to push applicants and existing borrowers alike towards principal and interest repayment loans. The carrot comes in the form of reduced rates for principal and interest structures and the stick is the loading of the rates for interest only borrowings, amongst other restrictions. The result is that interest only loans can carry a rate as much as 0.70% higher than the same loan on a principal and interest repayment structure. Many borrowers are unaware of the difference and that can be costing them thousands every year. If you have an interest only loan, particularly an interest only home loan, ask your lender what rate reduction you will receive if you switch to principal and interest repayments. It could be the greatest question you have ever asked.
Fixed or variable interest rate
The most common question we are asked about loan structure is ‘should I fix the rate on my loan’? This is more complicated than just changing repayment type and must be considered carefully. When a loan is under a fixed rate contract, additional repayments may be limited, redraw and offsets restricted and should you pay the loan out before the fixed rate expires, the penalties could be significant. There is always the risk too that the rates may drop, leaving you paying more than you need to. Fixed Rate loans are best suited to borrowers who cannot afford to take the chance on repayments rising as a result of rate increases. I have written previously about the pros and cons of fixing rates but if you have the capacity to make additional repayments or think you may sell your property in the short term, a fixed rate loan may not be for you.
A popular alternative is to split your loan and have part fixed and part variable, giving you the flexibility of a variable rate loan but the security of a fixed rate on a significant portion of your debt. A rare example of being able to have your cake and eat it too!
The rate on your loan is of course critical. If you are paying more than the market rate for a standard loan, you are costing yourself hard earned cash for no good reason. A lower interest rate will put more money in your pocket and gives you the option to reduce your home loan faster. There will be some costs to refinance your loan such as legal and registration fees, so care needs to be taken to ensure you are not offsetting any interest savings with the costs, but your finance expert will be able to detail these for you so you can make an informed choice. The bigger then loan, the more important the rate is and even a small reduction in rate could save you plenty.
Changing loan structures or even refinancing is not a difficult process. There may be a little paperwork, but that is a small price to pay for a change that could relieve your financial pressure or save you thousands. All you need to do is make a call to your lender, a finance expert or the team at Switzer Home Loans and they will get the ball rolling. The discussion you have may be best five minute chat you ever have.