What you need to know about refinancing in 2021

After a whirlwind year, many borrowers may be thinking about refinancing their home loan. If refinancing is the right move for you, it could be a great way to enter the New Year with extra savings in your pocket. Interest rates are at historic lows following multiple RBA cash rate cuts, so there’s a good chance you could find a better rate.

If you haven’t refinanced in the last 18 months, you could be overpaying. In this article we’ll go through what you need to know about refinancing in 2021, looking at the impacts of JobKeeper and repayment holidays, online home loan processes and how much you could save by switching to a new loan.

Massive rate cuts signal a great time to refinance

The RBA has cut interest rates 6 times since June 2019, leaving interest rates at new historic lows. Plus, they have also indicated that they will not look to raise the cash rate for another 3 years. So, 2021 might be the year to think about refinancing your mortgage. Most homeowners have 20-30 year home loans and the interest will really add up over this time. It’s smart to make the most of low interest rates while you can.

Borrowers looking to keep their low rate for the next few years could look into fixing their interest rate. Doing this will guarantee you a current rate for years to come. If you prefer flexible loan terms, you might want to look at variable rate mortgages.

Does JobKeeper impact your ability to refinance?

Millions of Australians have been kept afloat financially with JobKeeper payments in 2020. If you are still receiving JobKeeper payments as your primary source of income, your refinancing options may be limited.

When applying for a new home loan, you are assessed on a range of factors including your income. If JobKeeper is your income, consider whether these payments are enough to support a home loan refinancing application.

Most lenders will not consider JobKeeper as eligible income and if you’re now off JobKeeper, lenders may want you to be off it for a certain period of time before refinancing. This varies between lenders. Your chances of being approved for a home loan are improved by a strong application that may include:

• Having at least 20% equity in your home
• No requirement to pay Lenders Mortgage Insurance (LMI)
• Your property is considered ‘sellable’ in case you default on your repayments
• If you have a secondary income (e.g. rental income, partner not on JobKeeper) or strong assets and investments
• Few liabilities and financial obligations.

Some banks are more willing than others to consider refinancing the loan of someone receiving JobKeeper payments. A mortgage broker can provide guidance on where you should apply to, as well as which banks are open to refinancing JobKeeper applicants.

If you are no longer receiving JobKeeper repayments because you have found new employment or your employer is able to pay you in full again, your refinancing options are greater. Your chances of being accepted for a refinance will be greater if you have a few months of payslips to show post-JobKeeper.

Refinancing trends for 2021 - go online and compare home loan deals

Did you know that you can now refinance your home loan from the comfort of your home? Online home loan platforms (like Lendi) offer home loan comparison tools, as well as the capacity to apply for and settle a new home loan entirely online.

Of course this is great for those wanting to remain socially distanced, but it’s also often a lot more convenient. You have the ability to compare home loans and interest rates from over 35 different Australian banks and lenders.

This means you can look at the big traditional banks, as well as some emerging, competitive players and find what’s right for you. There are even specialty lenders out there, specifically serving borrowers with unique circumstances, such as poor credit and self-employment.

You can compare and review your current home loan interest rate here.

Can you refinance your home loan after a repayment holiday?

You likely won’t be able to refinance your home loan while you’re on a repayment holiday. However, you may be able to refinance after the repayment holiday ends. To increase your likelihood of being able to refinance, try the following:

• Show a solid repayment history for a few months after the repayment holiday ends.
• Spend time rebuilding your savings to show that you are financially responsible and in a better position than you were during the repayment holiday.
• Make on-time repayments towards any other loans or credit products (e.g. car loans, personal loans and credit cards). This will help boost your credit score that will be assessed with your refinancing application.

What lenders are looking for is evidence that your financial situation has improved to a point where you are comfortable making repayments on time.

Be aware that if you missed repayments before you were granted a repayment holiday, you may have difficulty getting approved for a new mortgage. Lenders could see this as a risk, and decline your application or charge you a higher interest rate to compensate for the risk.

Lenders will have different policies regarding refinancing after a repayment holiday, so it’s best to check with your lender to be sure. You may have the option to refinance with a different lender if your existing one won’t allow refinancing.

How much could you save by refinancing your home loan?

It’s no secret that a low interest rate is the key to making big savings on your mortgage. On average, Australian homeowners who refinance with Lendi save about $2,832* in interest over the next year of their home loans.

Even if you only secure a 0.5% interest rate decrease, you could still save substantially. For example, if you had a $400,000 mortgage with a 2.5% interest rate and a 25 year loan term, your monthly repayments would be approximately $1,794 per month. If your interest rate was 2%, you’d pay about $1,695 per month.

This would give you an extra $100 per month to invest, save or spend on something you like. It may not seem like a lot of money, but home loans last years and the savings will add up. Plus, on average, Lendi’s customers reduce their interest rates by about 0.89%* — so you could save even more.

Refinancing deals in 2021 - From cashback to zero fees

Now that rates are so low the market is hugely competitive and lenders are competing for customers. Many are offering hefty cashback deals — some up to $4,000 upon settlement! Others are offering zero fee loans and other benefits, so it’s always smart to shop around and work out what suits your needs best.

Be aware that many of these deals do come with conditions, such as fixed terms or Loan to Value Ratio (LVR) requirements.

What are the other reasons to consider refinancing?

Your home loan is much more than just its interest rate, so it’s wise to think about other reasons for refinancing. These might include:

• Altering your loan repayment term because your income has increased. The shorter your loan term, the less you’ll pay in interest.
• If you are unhappy with your lender. Maybe they aren’t very communicative, or their services are a bit old fashioned. Whatever the reason, it’s important to have a lender you can trust and can communicate with.
• To consolidate your debt. Borrowers with forms of unsecured debt can combine these debts within their home loan to get a lower interest rate and streamline their finances.
• To access cash from your equity to complete a renovation, make a large purchase or take a holiday.

This isn’t an exhaustive list. Sometimes you just feel that you can get a better deal that suits your current situation more appropriately. Whatever the reason, it’s definitely worth considering refinancing your home loan in 2021.

• The estimated average future interest savings is calculated as at 15 April 2020 based on Lendi assisting customers into new loans with an average interest rate reduction of 0.89% for the 11 months prior, and assuming a median loan term of 26 years on both the old and new loan and all monthly principal and interest repayments will be made on time. Any future savings figures are estimated averages only, and do not take into account any product features or fees (including refinancing or break costs). Your savings will be different.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.