In an environment of falling property prices and tightened lending standards, choosing to refinance may not be the best decision for some. Recent data from CoreLogic shows the fall in home values across Sydney and Melbourne has continued to accelerate the slump in the Australian housing market.
According to CoreLogic’s latest Hedonic Home Value Index, property prices dropped by 0.7 per cent nationwide in November, the weakest month-on-month change since the global financial crisis (GFC), with national values now down 4.1 per cent year-on-year.
Homeowners and investors who bought at the peak of the boom may have less-than-stellar refinancing options if valuations of their properties come back lower than expected or below the purchase price.
In order for refinancing to be worthwhile, investors must consider a number of options.
According to Ms Cannon, refinancing comes with exit fees, entry fees and government fees. Those looking for a new loan need to make sure that they will not lose money in the process.
“There are a few lenders that offer refinance rebates, which negates these costs but this should be considered to see the benefit,” she said. “Do a mortgage switching benefit calculation. We provide to our clients a calculation which shows the benefit of the refinance taking into consideration rate and fees.
“This shows beyond doubt the benefit, if any, to refinance.”
Investors should also consider how far into their loans they currently are. Refinancing to a longer loan term may result in lower payments in the short term, but it may cost more in long term.
“Previously, refinancing often took the loan back to the original loan term, which, if you don’t use the reduced payment as a way to pay down the loan quickly, means you pay more interest over the life of the loan,” she said. “I encourage people to keep the loan term the same, and when consolidating credit cards and personal loans, to do it over a 10-year period instead of 20 or 25 years.”
When considering refinancing, investors must also consider how their taxes will be affected. Ms Cannon urges people to remember that they might not always be able to claim on interest.
“Be mindful, that if you increase your investment loan, and it is not for any capital improvements on the investment property, you are unable to claim the extra or increased interest,” she said.
“Once you have paid down the debt, you are unable to claim interest greater than the balance.”