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Should you refinance when property prices decline?

Should I refinance my property?

 

In a market like real estate, long-term price fluctuations are frequent. If you are a homeowner (use the property as the prime residence) or a property investor impact of the drop in property price is a concern. But if you want to reap the best at this stage, minimise losses, and plan to refinance, this article is for you.

Why should I refinance my property now rather than later? 

When the value of your property has fallen to a level where your equity is less than 20%, there is a higher chance that you will experience difficulties in refinancing.  Further, refinancing when your  Loan to Value Ratio (LVR) is above 80%, there are additional costs such as Lenders Mortgage Insurance (LMI). You will pay LMI again, even if you have previously paid it.

Therefore in most scenarios, you have the option to refinance if your property value goes down but at an additional cost. But refinancing when you are in negative equity can be challenging. In this case, you need to consider refinancing before the property market declines further. 

 

What is Negative Equity? 

When the market value of a property falls below the value of its loan balance, its means you are in negative equity.

It is obvious that lenders do not offer loans if the property has negative equity. if the property value (the security value) is less than the loan, the lender is unable to recover the loan capital and default interest if the client defaults on the loan. 

Negative equity becomes a problem if you decide to sell the property when the market price is lower than the loan balance. In this situation, the owner may have to pocket out the difference between the sales proceeds and the loan balance. But if you do not intend to sell or refinance and pay your mortgage repayments on time, negative equity will not be a concern.

 

Refinancing Tips 

If you believe that your property is dropping in value and you are considering refinancing, here are a few tips.  

Tip 1 – Contact a mortgage broker

It is always a good idea to reach a professional when you need an expert’s opinion. A mortgage broker also has tools and resources to value the property, estimate the borrowing capacity and find out other factors which could support or negatively impact your loan application. 

You can reach us, at Rands Financial Services, and our specialized team will assist you in figuring out whether your refinancing goals are viable. Our Services are not limited to mortgage brokering and we are experienced in tax accounting. Therefore, our clients are assured of the most tax-efficient loan structures as we apply our investment property tax knowledge when structuring the loans for you. 

Tip 2 – Reach out to a lender

Discuss and find out if it is even an option to refinance by speaking directly to the lender you would like to refinance with. You will still have the opportunity to refinance if your property is not in negative equity. The limitation is that your options are restricted to the lender’s products and you miss out on other opportunities in the market such as cash-back offers.

 

Tip 3 – Find out the value of your property  

Getting an accurate valuation of your property helps you to be realistic with your refinancing options. A proactive Mortgage Broker, like Rands Financial Services, could help to get a property valuation.

 

Tip 4 – Decide the refinancing purpose

The purpose will affect your ability to refinance the loan.  If the prime purpose is to get cash out for a lifestyle purpose, the bank will need more information. But, if it is for the interest rate advantage, the bank will perceive the purpose as viable.

Tip 5 – Invest your cash from the equity release in a new property

There is no better time to invest in real estate than when it is at its bottom. It is worth considering a strategy to refinance your current home loan before the property value declines and release equity in form of a cash-out,  invest the cash out in a new property of your choice. You can wait till property prices decline further down and buy the next property. 

On this basis, you will receive a myriad of benefits from refinancing now even though the current property is declining.

 

Engaging a Mortgage Broker such as Rands Financial Services could be the starting point to achieve your financial goals irrespective of the market phase. Call us at 0434391331 or leave a message https://www.randsfinancialservices.com.au/contact-us/ and we will be in touch.

 

 

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