Refinancing a Home Loan: Impact on Your Home’s Value?
Are you thinking of refinancing a home loan but aren’t sure what its effects may be on the value of your home? Is the idea of refinancing rather daunting to you? Read this article to find out if you should go ahead with your refinancing plan.
You may not know it but Australia is in the midst of a refinancing boom. According to research from PEXA, refinancing increased almost 14% last year. “Refinances are at record levels,” says PEXA research head Mike Gill. “We [keep saying] record levels, and then the next month we receive new records again.”
Why the sudden interest in refinancing home loans? It’s largely due to interest rates going up. Homeowners are now keen to make sure they’re getting the best deal possible. Despite this, some homeowners may be holding off on refinancing a home loan. Why? They’re worried about the impact home loan refinancing might have on the value of their property.
The Basics of Refinancing a Home Loan
First of all, what is a refinancing home loan? It’s when you apply for a new loan to replace your existing one. This can be either with the same lender or with a new lender. Why are so many people refinancing mortgages? Usually, you’re refinancing a home loan to secure better terms. This could be lower interest rates, but it may also involve changing the loan term, gaining different features (such as an offset account), or accessing equity.
Should you be worried that home loan refinancing will impact the value of your property? No. A refinancing home loan will not change the intrinsic value of your home. Why is this a concern for many? It all comes down to understanding equity and your recorded home value.
A recorded home value is an official declaration of how much a property is worth. A formal valuation is performed by a licensed appraiser or valuer, and then the verdict is recorded by your lender.
Equity is how much of the property you own. You can calculate equity by taking the current value of your property and deducting the remaining value of your mortgage. For example, if your property is worth $500,000 and you owe $300,000, your equity is $200,000.
As property prices increase, the amount of equity you have also increases. And with some lenders, the more equity you have, the lower your interest rate can be.
But on the flip side, if prices drop, your equity will too. If the property value falls below the value of your mortgage, this is known as negative equity.
What Impact Will Home Loan Refinancing Have on Your Home’s Value?
A refinancing home loan will involve a new valuation of the property so that the lender can determine your equity. They will use this to calculate your Loan to Value Ratio (LVR). The LVR shows what percentage of the total property value you need to borrow. If your LVR is higher than 80%, the lender will classify the loan as high-risk and charge you Lenders Mortgage Insurance (LMI).
If house prices have gone down significantly or if you obtained your original loan with a smaller deposit, a refinancing valuation may show that your equity is less than 20%.
Just to be clear, it’s not that refinancing has caused your property value to go up or down. Rather, as part of the refinancing process, your home will just receive an updated valuation, and that recorded home value will change (for better or worse, depending on the housing market).
Talk to a Broker About Home Loan Refinancing
Don’t hold back on refinancing if you’re worried about the value of your property and how it might impact your LVR. Doing so could result in you paying thousands of dollars more in interest every year. Instead, talk to an experienced broker for some professional advice tailored to your situation. A broker can answer all your questions, evaluate your LVR, and assess whether you could benefit from a refinancing home loan.
Refinancing a Home Loan with North Brisbane Home Loans
At North Brisbane Home Loans, we’re committed to helping homeowners with refinancing mortgages. Ultimately, we want what’s best for you. That’s why we offer free ‘Home Loan Health Checks’. These routine check-ups will establish whether you’re better off staying with your current mortgage or if you should apply for a refinancing home loan. Book your ‘Home Loan Health Check’ today to see whether or not you could save by refinancing a home loan.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
