Finance

HOW CAN I IMPROVE MY CASH-FLOW DURING THE COVID-19 PANDEMIC?

Want to free up some cash? Check your inactive subscriptions and auto-payments have stopped. Find out a mortgage refinance is a good option for you and more.

I recently went through my credit card statement to check that my Pet Insurance payment had been coming out (luckily it had, because I have the most expensive rescue dog in the world – did someone just say “second cruciate ligament operation”?). Anyway, upon reviewing my statement I noticed a few things that needed attention. Firstly, I was paying 2 YouTube Premium subscriptions (Ugh! How did that even happen?), a subscription for a book club that I have never used, and there were a couple of other transactions totalling around $300 that I was clueless about.

If I’m blowing all this money each month without even realising it, I figured there’s probably a lot of you out there in the same boat, so maybe it’s worth reviewing everything with a fine tooth comb and sorting through all your subscriptions, auto-payments, reviewing your insurances and of course, your home loan interest rate. 

Can I refinance my home loan during Covid-19?

Since Covid-19 (or as I have been calling it, “Cororovi”) a lot of lenders have reduced their fixed rates by around 0.7%. This is a HUGE rate drop and is not ‘normal’ (whatever ‘normal’ means!). So, why not take advantage of these rates? My team and I have been inundated with requests to switch loans (loan variation) to one of the low fixed rates on offer. Often this can be done by staying with the same lender (i.e. not refinancing) or if it’s worthwhile, refinance to another lender to get a lower rate and even a possible refinance rebate (up to $4,000 cash back to pay for refinance costs and to entice you to switch lenders).

We didn’t have access to these extremely low fixed rates just a few months ago, so by taking advantage of these rates now, at least means we can achieve something good out of this pandemic.

I do not think these rates will last forever.

One glaring issue is whether you would qualify for a refinance. The Australian economy and the country as a whole, are facing challenges such as reduced work hours, reduction of incomes, and job losses.  So, although refinancing your home loan can make a lot of sense with the current low interest rates, it may not be easy for everyone.

Should I refinance my mortgage now?

If your employer faces few risks and your finances are still in decent shape, you are probably in a good place to refinance your home loan. The lending industry is diverse and highly competitive in attracting good quality borrowers (did someone just say “2.19% and a $4000 refinance rebate”?!) so if you are on top of all your repayments, have a job, and have a low loan-to-value ratio (LVR), you would likely qualify.

If your loans are four or five years old, and haven’t been reviewed since they were set up, interest rates 5 years ago were a lot higher, so you could be looking at a 1.5% rate drop compared to your current rate. On a $400,000 loan this would save you $6,000 per annum (dude, that’s $115 per week!).

The process of applying for a refinance may be more stringent than normal (again ‘normal’! What does this even mean anymore?!), as they will look into things such as financial health (are you keeping up to date on all your repayments, do you have some savings in the bank etc), job security, credit scores, and the amount of equity in the property – however lenders are still eager to gain good borrowers and lend money.

I am unemployed. Should I consider refinancing?

Generally speaking, no, you would not qualify if you’re unemployed. A basic rule for lenders is to only lend money to those who have a plan to pay it back. Therefore, if you and your spouse are unemployed or have reduced incomes due to Cororovi, you probably won’t qualify. Lenders are also less likely to approve applications for people who have casual or contractor jobs.

People working for businesses who are part of the government’s new JobKeeper scheme, which works by giving salaries to employees of businesses affected by the pandemic, may have better chances for approval.

We can check these out for you and put a plan in place so that if not now, then sometime in the future you can revisit this refinancing option.

What should I look for if I decide to refinance my home loan?

Start by checking things such as your credit score, value of your property, and ensuring your LVR is 80% or less. After that, we will shop around for you to check the following:

Low interest: Generally speaking, the purpose of refinancing is to achieve lower monthly payments. We will always choose a lender that offers reduced rates especially if you already have a sizable chunk of equity and have regular income. 

Flexible payment options: Fixed loans don’t allow you to pay much more than the agreed monthly payment. So, if you want a loan that has some flexibility to make additional repayments, you will need a portion of your loan to be variable.

Check the fees: Loan refinancing comes with around $850 in fees, which includes the discharge fee with your current lender, settlement fee with the new lender and the government fees (yep, the gov takes a cut). Fees are higher if you have less than 20% equity or have an existing fixed rate loan. We weigh up the costs of the fees versus the ongoing interest savings to know if it’s worth it. 

What are my other options?

If it turns out that refinancing is not suitable, then you can try other options to help reduce the load of your mortgage payments.

The pandemic and social distancing has affected a lot of industries. Therefore, lenders have introduced relief packages to provide financial assistance to affected families. Some lenders offer repayment pauses which I’ve spoken about previously (see previous video – Week 1 of Social Isolation), reduced payments, extending IO periods and reducing interest rates.

Call your bank or lender and tell them the situation. Ask for a repayment deferral. I think there’s more to gain, than to lose, by deferring your repayments (see previous video – Week 5 of Social Isolation). I have deferred 3 home loans and a business loan – it only took my lender 8 weeks to process the request! Or, ask if you can pay off the interest only and not the principal. Those moves can greatly reduce your monthly cost and provide some relief. Do it right away before things get tough.

If you have built up some redraw in your loan by making extra repayments, you can also ask to have a ‘Repayment Holiday’ (not all lenders allow this). This is similar to the deferral, except the difference is that as your interest capitalises each month, the redraw you have accumulated will decrease (you’re effectively using your redraw to make the interest payment). 

Any of these options can help you get back on your feet as soon as the pandemic is over.