Refinancing a home loan for lower monthly payments

For many Australians, a large portion of their monthly budget will go toward home loan repayments. With property prices being high across most of the country, repayments tend to follow suit, not to mention, 10 cash rate increases in the last 11 months, announced by the Reserve Bank of Australia (RBA). Therefore, it’s important to find ways to reduce the cost of your home loan repayments where possible.

An obvious way to reduce how much you spend on your monthly mortgage repayments is to get a lower interest rate.

A great option to lowering your monthly mortgage payment is to refinance your home loan to another lender offering a better rate. You can also choose to extend that loan term if possible, which can make it easier to pay your mortgage on time every month while also possibly covering your other debts and expenses. You can also nominate an Interest Only period.

If you’ve had your current home loan fixed for a number of years and it is expiring or maturing soon, your new monthly repayments will jump by 20% to 30%. This has been named the ‘Fixed rate cliff’ – a steep increase in costs for about $400 billion worth of fixed rate loans expiring this year alone!

Variable rate loans too have now risen in line with the RBA’s announcements from historical lows of circa 2020 until May 2022. Reviewing what rate(s) you are on is paramount.

Most lenders are offering larger discounts to secure new customers if choosing to refinance. Some are also offering ‘Cash Backs’ up to $5000. Refinancing your home loan could save you tens of thousands of dollars in interest over the life of the loan.

Contrary to belief, refinancing your existing home loan has never been easier and working with a brokerage firm like Bell partners Finance, we make it even easier.

This case study reflects on our clients Ian & Olivia Haigh.

Ian and Olivia are in their late 40s with a young family and are one of our very valued and satisfied existing clients. They had recently completed renovations on their Leichhardt home in Sydney’s Inner West with a $1,650,000 mortgage remaining.

They had three loans with their previous lender with one loan that was fixed for 3 years @ 1.89%. The fixed loan expired in January 2023 and the revert rate or cliff rate was 5.29%. Ian & Olivia’s monthly repayments on this part of the loan rose from $3168 to $4826 or an extra $1658 extra per month in repayments.

Loan 2 was a construction loan which reverted from Interest Only to Principal & Interest once the occupancy certificate was granted. The rate and repayments also increased.

As the RBA Governor Dr Philip Lowe has alluded, there may be additional cash rate increases for the calendar year of 2023, to bring inflation under control. Ian and Olivia are very aware if this and have decided re-fix 70% of the loan for two more years and split 30% variable.

Problem-solving:

Ian’s business was impacted by COVID in 2021 and the company reported a loss in that financial year. This made it difficult to service the loan with banks requiring the latest two years Income Tax returns and financials for all entities and personal Australian Taxation Office (ATO) Notice of Assessments (NOA); COVID government grants like job keeper and cashflow boost are not considered regular ongoing income by the majority of lenders, effectively lowering their borrowing capacity.

However, the business has since recovered with revenues and profits higher than pre-pandemic levels and this growth is indicated in their draft FY2022 Tax returns. Their accountant had not lodged but stated in on a signed letterhead that the ‘Draft Tax Returns for FY2022 are final and will be lodged as is’. This and accompanying lodged Business Activity Statements (BAS) for July-September (Quarter 1) November-December (Quarter 2).

Olivia has been employed outside the business since 2019 but is still a shareholder. She occasionally does some work for the business and is remunerated accordingly.

They have already approached their existing bank and were offered a 2-year fixed rate @ 5.79%, which was less than satisfactory hence choosing to refinance to another lender.

Research methodology:

For clients in the position of Ian and Oliva, it was so important to do everything possible to make the process a smooth and pleasant one, and to show a high level of care and empathy. The second part was easy, as they are such lovely people it came effortlessly!

We travelled to meet with them in their Leichhardt home, at a time that best suited their routine. The meeting was unrushed, and we enjoyed their warm hospitality (tea and biscuits) while hearing stories about their family and lives. This also included the polite, frank, and respectful discussion around Ian’s company and Olivia’s role and the lower rates they needed and the huge impact that would have on their lives.

We explored the market offerings and what the process was moving forward, answering any questions they had before we helped them collect the necessary information and documents which would be required for the refinance application. We returned to their home to go through and sign the application forms with them in person.

Analysis:

While Ian’s company FY2020 & FY2021 tax returns and Olivia’s PAYG income were suggestive of a circa $1,200,000 borrowing capacity when reviewed in the traditional prior two (2) year method, further documentation was requested by us.

Utilising the company draft FY2022 tax returns and accompanying first two (2) quarters of FY2023 lodged Business Activity Statements (BAS), reflected a large 40% increase in core revenue and profit. With the provision of accountant prepared year to date financials, profitability levels had not only returned but exceed pre-COVID levels.

It was clear that the traditional prior two (2) year method of assessing income levels was not a true reflection of the business’s current financial position and therefore not a true indication of the individual’s borrowing capacity.

In recent times with COVID, a large range of mainstream lenders had learnt to become more flexible with assessing income, so the first port of call among the 40 plus lenders we have available on our panel are those that may consider a larger loan based on the most recent BAS statements and accountant prepared year to date financials in isolation.

There are a whole host of non-major lenders that as a matter of course offer products specifically designed for the self-employed without the need to provide two (2) years financials and tax returns at all. These include lenders that rely on other forms of income verification such as 12 months BAS statements, or six-month business transactions bank statements or simply an accountant’s letter verifying the individuals’ circumstances. We left Ian and Olivia at their home giving them the confidence that we would get their required loan sorted.

Once it was established which lenders would be able to assist Ian and Olivia, a process of comparison was needed to help determine which lender would best meet their needs and requirements and offer the better outcome.

This involved looking at the lenders upfront charges and any ongoing fees, their interest rates, and how quickly the lender would provide an answer given the clients were paying higher monthly repayments due to higher rates.

With refinancing existing mortgages, the borrower(s) must demonstrate the ability to service the required ongoing loan repayments and meet a process of qualifications and checks that needs to take place. This ranged from simple identity verification tasks through to assessing the loan funds required against the value of their property to ensure they were within the parameters offered by the lenders.

Once it was established which lenders would be able to assist Ian and Olivia, a process of comparison was needed to help determine which lender would best meet their needs and requirements offer the better outcome. This involved looking at the lenders upfront charges and any ongoing fees, their interest rates and features requested.

Recommendations:

The recommendation provided to Ian and Olivia was a refinance with St. George Bank;

The reasons for this recommendation were based on:

• St. George Bank would view the loan favourably allowing using Ian’s company draft FY 2022 Tax Returns with accountant’s letter and FY2023 Q1 & Q2 BAS’ to secure the required funds to refinance for Ian and Olivia.
• Ian and Olivia had expressed they preferred either a major bank or a well-known second trier lender. They would not feel comfortable with an unknown named lender to them and ultimately were comfortable with St. George Bank.
• Having a local branch presence was not important to Ian and Olivia as they are used to doing internet banking which they prefer and find far more convenient.
• Ian and Olivia needed the lowest 2-year fixed rate and St. George Bank was the lowest
• Able to provide this formal approval within 14 business days of application submission
• St. George Bank were the most competitive lender available on our panel across the areas of upfront charges, ongoing fees, 2 Year Fixed & Variable interest rate
• Rate lock was offered and accepted by Ian and Olivia securing the 5.59% rate

Results:

We were able to obtain refinance for a 70% 2 Year Fixed rate of 5.59% and 30% variable split rate of 4.99% with pricing discount applied for the required refinance amount of $1,650,000. They were able to reduce their monthly repayments to a level they feel comfortable with considering the impact of the fixed rate cliff increase.

Lessons learned:

Being able to understand and accommodate the needs, requirements, and limitations of Ian and Olivia were critical to achieving a success outcome. The process was one they could not have undertaken on their own without assistance, and it was important that the experience was pleasant and involved minimal stress.

There was a significant issue as the loan was originally submitted to Macquarie Bank. At the time, Macquarie Bank had the lowest 2 Year Fixed rate of 5.29%, but during February, and after the RBA announcement, it increased to 5.79%, a massive 0.5 percentage point increase.

Ian and Olivia had formal approval with Macquarie, but after the rate increase, they chose the proceed with St. George.

Macquarie Bank does not offer rate lock and will honour the rate if formally approved. However, in this instance, we were reliant on their accountant to provide the accountants letter and lodged BAS which he hesitated to do causing Ian and Olivia to miss the formal approval deadline.