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Comprehensive Understanding of Refinance

June 26, 2015

The current exchange rate from Australian dollar to RMB is entered to “4 era”, as the European central bank launched trillions of euros in quantitative easing, Australia’s central bank cut interest rates even worse. Everyone feels it is a good time for investment in Australia.

Please don’t ignore that for someone who has mortgage, it is a good time to do refinance loan restructuring to save money.

Normally, the loan restructuring is a wise decision: you can save money by month or reinvest cash from the appreciation of house prices and more competitive loan product (such as lower lending rates), this may even help you to pay off the loan in early time.

“Refinancing” usually refers to terminate home loan with bank, and transfer the loan to a new bank. During the transfer, the property will be valued again, in order to cut down LVR (loan to Value Ratio) or remain the same.

“Refinancing” also means you do not need to change bank and ask for re-lending loans to achieve some purpose; usually we call Internal Refinance (mortgage products or structural changes) or top up. If it is to change the bank, this will generate some additional costs, such as Discharge Fee, Early Repayment feeds/Deferred Establishment feeds (such as prepayment penalties) and government deeds and Discharge and Registration for the loan, plus the loan application fee from the new bank.

Why do you want to refinance?

  1. New bank may provide more preferential interest rates, so for a long time to save money is greater than the fee when transfer loan.
  2. Considering buying an investment property and the original bank has strict examination and approval conditions, refinance to new bank can examine and approve a higher amount of the loan amount.
  3. Property value increase. When doing the Loan restructuring, the bank need to re-evaluate the property, if necessary, you may require the bank to increase lending quotas, get some cash out for other purposes (also as Equity in Loan A/C, for later use) at any time, usually stored in offset account, make money more flexible.
  4. Packing other loans (personal loans/credit card Debt, auto loans, etc.) to home loans, to reduce pay interest, it is the so-called Debt Consolidation. Including a lot of people get money to buy cars from the mortgage.

For example

The first year,

Purchase property worth $100k, loan is $90k; he paid $10k and other government fees. The buyer chooses the IO Loan Interest Only, and only pays minimum payments. At this time LVR is 90%.

In the third year,

Your loan amount is still $90k (because you didn’t pay for any of the principal), but now the house value increased to $125k, at this time LVR is 72%.

In the fifth year,

Your loans dropped to $80k (because you paid some of the principal), now the house value increased to $150k, at this time LVR is 53%, and then you may decide to: a. to buy a new car; b. to buy an investment property; c. to get married

You need an extra $50k loan. Whether you’re replacing bank, or use the original bank to do refinance, you get another $50k, and new loans increased to $130k, building evaluation value of $150k, at this time LVR is 87%.

* In the Refinance, we often use Slip Loan Accounts, such as for property value appreciation, we could lend out more loans, and we open a new account for convenient management. If transferred to another bank, you can also open two accounts to manage your loans.

Time schedule is about 4 weeks:

First week: valuation and application

Second week: loan documents processing

Third week: waiting for the loan documents certification; new bank and previous bank communication discharge and arrange settlement.

Fourth week:  Settlement

Sometimes discharge might cause delay. Many banks through First Title insurance companies, such as through Fast Refi products, you do not need to do Discharge in advance, but after Refinance application approved from a new bank, pay off loans directly at the settlement, and then make the settlement more smoothly. (Usually in the case of the buyer is not ready to Discharge or the original bank Retention using Fast Refi).

To remind that whether to transfer loan or not, our ultimate aim is to maintain a healthy state of the economy and the pursuit of high returns of investment portfolio. For home loans, the loan operation rules are very different from main residence and investment residence.

For the housing loan for main residence, our biggest goal is to reduce loan as much as possible to reduce loan interest payments, strive for an early payment loans;

For loans for investment property, we should constantly monitor the value of investment property and the difference between the loans, if the investment property has made a lot of appreciation, we can increase loans to purchase a new investment property for reasonable tax avoidance.