When you want to break up with your bank...but you can't
Are you finding yourself in this situation at the moment? You've finally decided to make the break - in some ways your hand has been forced by the financially constrained world we all live in - but when you tried to 'break up' with your bank you couldn't?
What we are seeing in this high interest rate world we are currently living through is that for some home loan customers, there are two things which are biting them when they go to refinance.
Number 1? That their borrowing power has reduced. Few realise that as home loan rates have increased, the rates at which banks assess you (called the assessment rate) has also gone up. It is that buffer which is having banks assess many customers not at 5% interest rate but 8%. The end result? Borrowing power for many home loan customers has reduced, compared to 12 months ago.
Number 2? Valuations. For some customers whose loan was high as a percentage of the value of their properties now find that with a softer valuation that Lenders Mortgage Insurance can make it not worth their while to move their loans.
The end result is that some customers feel tied to their current banks even when they may not want to be.
It may feel like in this situation all is lost. However for some clients (not all clients) there are things you can do to improve your chances of refinancing.
With banks assessing borrowing power at a higher rate, the key for some customers it is looking at where money is being spent where it could be cut back. Pre interest rate rises and Covid, many Australian's didn't have to think much about spending money. They - and we - just did. However this higher interest rate world means we must all now start to make choices about how we spend our money. Which feels uncomfortable and we don't like it. However by choosing to delay gratification and showing up to have lower living expenses on a refinance application, can help in boosting your borrowing power.
Credit cards. These days there is a lot of enticement to chase reward points via new credit cards often with $10k to $15k limits. What many people don't realise is that every time you take out a credit card, your credit record takes a hit. You receive a lower credit score than you would otherwise. The credit card limit itself being in place reduces your capacity to borrow. So if you don't need the credit card, don't have them. And if you are chasing reward points via a credit card, understand that it may impact upon how a bank assesses you.
While for some clients they have no choice right now than to stay put with their current banks and wait for the interest rate tide to turn (which we are all hoping it will by mid year). For those who may be on the cusp in regards to being able to refinance, tweaking your behaviour and forgoing some things you would like (rather than need) now, can reduce your living expenses in the bank's eyes. Do this for a couple of months and it may well help you and your broker to get you into a better rate loan which can give you some breathing space.
