REFINANCE LOANS
To refinance a home loan, is what most people think of when it comes to mortgage refinancing. It includes replacing your original home loan with a new one.
The refinance could include a different term, interest rate, product, and Lender. In the current financial environment, higher interest rates are making clients look at refinancing options. Clients could be looking to get the best rate, reduce their repayments, or gain features within a mortgage loan that they currently may not have. In essence, refinancing is changing aspects of a mortgage.
As the Broker, you can help your clients compare home loans to meet their needs and help them find product/lenders that will be in their best interest.
ASIC associates higher obligations with refinancing, switching and debt consolidation activities. They would expect Brokers to undertake additional analysis for refinance applications, taking into consideration of whether entering the new credit contract:
a) would result in overall cost savings to the client, which are likely to override any loss of benefits; or
b) may result in minimal cost savings, but the new credit contract better meets the client’s requirements and objectives (e.g. because of convenience, greater flexibility, or tailored features such as a redraw facility on a mortgage).
Benefits of Refinancing
Refinancing to a lower interest rate can lower the client’s monthly mortgage repayments.
Where clients have built up good repayment history, you can look to eliminate a
specialist lender or private loan on a higher interest rate.
If there is financial distress, consolidating debts could help to reduce monthly
commitment.
Where the current loan no longer meets the client’s needs. To change to a different product to improve loan features
Cash out/access equity in your home
When is Refinancing NOT a good idea
If the cost of refinancing outweighs the benefits to the client.
If the current rate on their home loan is already low.
If they are planning to sell in the near future.
If the clients are currently on a Fixed rate loan, as penalty clauses would apply and may not be in the client’s best interest.
Cost of Refinancing
While refinancing can provide benefits, it can also have associated costs. Below are some costs to consider and discuss with your clients (but not limited to):
Loan application costs with the new Lender
Valuation costs with the new Lender
Settlement fees with the new Lender
Government registration fees for a new mortgage and release of existing mortgage
Discharge fees with the outgoing Lender
Fixed Rate penalty fees (if breaking a fixed rate contract), these can be substantial depending on the Fixed Rate and term remaining
Lenders Mortgage Insurance if lending is >80% (LMI is not transferable between the Lenders and will be an expense again to the client, even if being capitalised)
Refinance Application tips within Infynity
It is recommended that you complete a Refinance Calculator. The calculator needs to be completed on the $ for $ refinance value (excluding any cash out component), save and upload to the client file. Discuss and provide the calculations to your clients so they understand the differences associated with the proposed refinance.
You should calculate and include the total cost of a new loan compared to the existing loan. The new loan cost will include the closing costs, prepayment penalties (if any) and the interest paid over the life of the new loan. This should be lower than the remaining interest that will be paid on the existing loan to see if it makes financial sense to refinance.
Make notes within the SOCA and client account to detail the refinance benefit.
Within the SOCA, when selecting a Refinance loan objective, you need to toggle on that it is a refinance application and complete the reasons for the refinance and that you have had discussions with your clients regarding the relevant refinance risks. Provide a response to each question.
Make clear notes within the client account to demonstrate your understanding of the client requirement and benefits to the client in refinancing. ASIC has stated that if clear information is not recorded on the client file, the broker will have difficulty demonstrating that the broker has complied with responsible lending obligations.
Refer to the Refinancing, Switching and Debt Consolidation document and the Refinance Checklist, which you can download from the Resources >> Document Library>> Business view documents >> Compliance. Below is a copy of the checklist of the main things to consider for Refinance/debt consolidation loans.
Disclaimer: This information is current as at the time of each QRG publication. It is a general information guide only.