The current interest rate rise environment has prompted many home loan borrowers to seek refinance opportunities, particularly involving a restructure of their existing lending.
As interest rates continue to increase, a refinance can help borrowers manage their cash flow by reducing the repayment amounts and hence ride out this period of the rate upswing cycle.
Resetting the loan term
One way of reducing monthly repayments is to refinance your loan and re-setting the loan term to a full 30-year period i.e. extending the loan term. In other words, the existing borrowing will be repaid over a longer timeframe, and hence reducing the amount of each repayment amount.
For an outstanding loan of $1.4M with 20 years remaining, at an interest rate of 4.6% pa, repayments can be reduced by $1,756 per month by re-setting the loan term to 30 years.
Switching to Interest Only repayments
The second way to minimise loan repayments by refinancing is to re-set P&I repayments to Interest Only. By switching repayment types while not extending the loan term, (NB: this is subject to you passing serviceability) you will be temporarily reducing the magnitude of your repayments until the end of the IO period. Please note that this is subject to you passing serviceability, because you will have a shorter timeframe to pay back the principal once the IO period ends.
Using the same example above, for existing borrowing of $1.4M, repayments can be reduced from $8,933 at 4.6% pa (P&I) to $5,717 at 4.9% (IO), thereby reducing the outlay by $3,216 per month.
Case Study – Refinance + Top Up
A refinance can be internal or external. An “internal refinance” is simply when the borrower stays with their existing lender, while an “external refinance” is when the borrower discharges their loan with their existing lender and brings it to another lender.
For home owners who have sufficient equity in their property, a refinance can allow them to seek additional lending (“top up”) towards different purposes. For example, cashing out funds for new renovations, purchase of a vehicle or purpose of an investment property.
Our team recently helped a PAYG client with an internal refinance of their owner occupied property in the upper North Shore and apply for a top up loan.
The client, an Executive Director of a major Australian infrastructure company, approached SF Capital to help him achieve the goal of refinancing his owner occupied property. The property at that time had a market value of $4M, or a 35% LVR with the existing borrowing ($1.4M). He also wanted to top up the loan to purchase an investment property purchase of up to $600K.
As part of this internal refinance, he would also be re-setting the loan term to 30 years so that he could focus on paying down the owner occupied home loan which would allow him to continue building wealth during his working years.
Given the mature age of our client, it was important to put forward an exist strategy, given a new 30-year loan term was being requested. We presented the exit strategy as follows:
- the client would sell the proposed investment property, and downsize the home;
- the client would continue to pay down the owner occupied portion of the loan over time as a high income earner; and
- the client with his wife have a combined superannuation value of over $1M.
As the broker managing this deal, in order to progress it in the application, we had to manage queries with the credit assessor about the client’s declared household expenses. This is because the bank has visibility of the client’s transaction history given he also with this bank.
The end result achieved for our client was total borrowing of $2M (at 50% LVR) over a 30-year loan term, in both P&I (owner occupied, $1.4M) and IO (investment, $600K) loan splits, at variable interest rates, with offset accounts set up.
If you are considering refinancing your property, topping up the loan or have a scenario you’d like to discuss, please get in touch with our broker team or fill out our online assessment form and one of our brokers will give you a call within 5 business days.