How the rising value of your home can help you land a better rate
If you purchased a home in the last few years, chances are the property is worth a lot more today than when you bought it.
In mid-2019, the median home value across Australia's capital cities was $592,135. Today, that figure has soared to $715,100. It's a 21% gain that goes straight to your home equity. And it could see you entitled to a lower home loan rate.
Mortgage interest rates are based on the risk you represent to lenders. As a general rule, the bigger your deposit, the more equity you have, and the less risk you pose to the bank. This explains why some of the cheapest rates are reserved for buyers who can stump up a 20% or even 30% deposit.
The beauty of rising home values is that it increases your equity in much the same way as having a bigger deposit. Let's say, for example, you purchased a $500,000 home in 2019 with a 10% deposit of $50,000, and a loan of $450,000. In that case, your loan-to-value ratio (LVR) - the amount you borrowed as a percentage of your home's value - would have been 90%.
Fast forward to mid-2021, and your property may be worth 20% more, potentially $600,000. Even assuming the loan balance is unchanged at $450,000, your LVR could be closer to 75%. That's less risk for the lender, and a decent chance you could be eligible for a lower rate.
Deslie Taylor, Principal of Mortgage Choice in Ormeau (QLD), explains, "If you have a variable rate home loan there can certainly be scope for a rate reduction. I encourage all homeowners to contact their lender every six months to ask for a rate review. After all, the lender isn't going to call you offering a better deal."
Have clear evidence
According to Taylor, it's a good idea to strengthen your case for a rate cut by providing evidence of an uptick in your home's value.
She notes, "The best evidence is information drawn from the lender's website. It's hard for the bank to dispute these figures as they come from their own data."
One in two lenders come to the party
There are no guarantees you'll be rewarded with a lower rate.
Taylor says, "We find that 50% of the time, lenders will come to the party and offer a rate cut. But it's always based on risk. The more equity you have, the lower your LVR, and the better placed you are to renegotiate the rate."
If your LVR has dropped from 95% to 90%, the risk to the lender hasn't reduced significantly, and Taylor says you're only likely to get a limited rate cut. However, it costs nothing to ask, and even a small rate discount means savings on interest and lower repayments.
What about a discount on LMI?
The prospects of scoring a refund of lenders mortgage insurance (LMI) aren't so good.
Taylor says homeowners are only eligible for an LMI refund if they pay out their loan in full within 12 months of taking out the mortgage. Even if you manage this Herculean feat, the maximum refund is typically just 40% of the LMI premium paid. And getting a refund at all is at the discretion of the mortgage insurer, not your lender.
Should you refinance?
If you're keen to pocket a rate cut, your current lender should always be the first port of call. If they won't come to the table, it could be time to look elsewhere.
The catch is that if your LVR is still above the 80% benchmark, you'll be asked to pay LMI a second time. While this may seem unfair, it doesn't necessarily make it uneconomical to switch to a new loan.
A line-up of banks are offering cash incentives to refinancers. St George, BankSA and Bank of Melbourne for instance, have cashback deals worth up to $4,000 to refinancers. Bank of Queensland is offering up to $3,000.
"These additional benefits plus the savings of a lower rate can mean homeowners still come out in front financially even if they have to pay LMI on refinancing," says Taylor.
Traps to avoid
The big trap to avoid is overestimating your home's value. Lenders often use automated desktop valuations based on comparable property sales in your area. But they can opt for a full valuation conducted by a professional valuer. And that's where the danger area lies.
Taylor says a full valuation can be triggered by a variety of factors including your location, the type of property, or the LMI insurer may request a formal valuation.
As Taylor observes, "I'm finding at present that if the LVR is clearly below 80%, the lender often won't ask for a full valuation. It's when a homeowner is in LMI territory (near to or just above 80% LVR) that they face the risk of a full valuation."
The rub is that full valuations typically result in a more conservative figure than a desktop value.
"So you may go through the process of refinancing only to find at the eleventh hour that you really don't have sufficient equity to make a refinance worthwhile," says Taylor. "It can be very frustrating."
The bottom line
If you've got a great repayment track record with your current lender, it's worth haggling for a rate discount. If you're hovering around the 80% LVR mark, a mortgage broker is well-placed to let you know if refinancing can put you in front financially, and which lenders are likely to give you the green light.
It's worth stressing the opportunities to renegotiate a rate or save by refinancing work best for variable rate home loans. It's a lot harder if you have a fixed-rate mortgage as break costs can apply if you bail out of the loan during the fixed term.
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