A refinancing rush is on. Ten cash rate hikes totalling 350 basis points has added over $1,100 per month to the average $604,346 loan, and mortgage holders are feeling the pinch.
A record $17.8 billion home loans have been refinanced over the past 12 months as homeowners rush to find a better deal.
So, how can you give yourself the best chance of getting approved for a cheaper loan, and slash your repayments by hundreds of dollars per month?
These three steps will help.
Read more from Nicole Pedersen-McKinnon:
Step 1: HEM your spend
In recent years, a whole bunch of beefed-up borrowing rules have created new wrinkles and rule interactions that could see you rejected for a loan.
You’ll probably even have to qualify under these conditions if you stay with your existing lender but make a material change to your loan – for instance, take it out over a fresh 25 or 30 years to cut your repayments.
That will require a new ‘serviceability assessment’ which will require you to pass the ‘safe borrowing’ tests.
The first of these tests relates to a little-known concept called the household expenditure measure (HEM) – yep, this gives a lender an idea of how much it costs to run your or your family’s life.
HEM suggests the average expenses for your circumstances across a dozen or so categories: groceries and other household expenses, clothing and personal care, owner-occupied utilities and rates, investment property utilities and rates (if applicable), insurances, transport costs (fares, fuel, rego, etc), telephone, internet and other media (pay TV etc), medical and health, education, childcare (where applicable), recreation, sport and entertainment, child maintenance (if applicable) and other.
Heard of the Netflix tests? This is it.
And you need to seriously trim your budget, and stick with it for the preceding three months.
But there’s no point going into economic isolation. If your actual spend falls below that suggested by HEM in your situation, a lender will use the higher thereof. So keep it realistic or it will raise an alarm.
Also on this expense side, a credit card could cause you real problems. A formula will be applied and sufficient income to repay your entire limit – even if you carry over $0 worth of debt from month to month – ruled out.
You may need to reduce your limit as a result. But bear in mind, credit cards too are harder to get (and get approved for more money) too.
So that’s pruning your budget. Next you need to preen for your unfiltered money selfie.
Step 2: Sort your score
Your credit score is a snapshot of your financial self – think of it as a money selfie… with no filter.
It is vital you take preparatory steps and present yourself in the best light because this one number could, just like your expenses, make or break your loan application. So, how do you make sure it is good?
Get your free credit report and score from one of the three legitimate places well before applying for a loan and check everything on there. It’s crucial to hold back from applying until your score is squeaky clean.
Is it all correct? You can ask the institution or company to correct what’s not, or the credit bureau if they do not. Or perhaps you have made moves that have pushed down your score.
Missing repayments will obviously sink it, as will any late payments if over 14 days late for any credit repayment in the past two years or over 90 days late for any other bill in the past five years. And getting rejected for a mortgage will drive it down further.
Step 3: Up your income
It’s easier said than done but it’s also about having the right type of income. Thanks to current staff shortages, lenders give preference to people who are ‘employed’ above all others. But they don’t like when employees rely on overtime to prop up their salary.
They’ll view casual workers equivalently harshly. They may even rule out a whole month of income, assuming you are in the luxurious position of being able to take four weeks off a year.
And small business owners or self-employed applicants will have to jump through ridiculous hoops to get approved.
If you can, get employed before you apply. Even if part-time, on the side of running a business. And get those tax returns in order.
Is it worth it? It sure is. Despite the throngs of Aussies who have already refinanced, almost one-in-five still intend to do so in the next six months, says Finder.
And their motivation, pure and simple, is to slash their mortgage repayments.
With the best-value home loan still below 5 per cent, representing a repayment on the average loan $654-a-month lower than the undiscounted big four rate of 6.75 per cent, would you join the stampede to refinance and save?