Many people misunderstand refinance that they could only cash out from one bank to another if the value of a property increased. However, in fact, through ‘Top up’ or ‘internal refinance’ of bank, it is also possible to cash out the appreciation portion in accordance with the standard loan ratio of 80%. For example, for a $500,000 contract priced property with 80% LVR, whose value has increased from $500,000 to 600,000 by $100,000 after two years, the portion that can be cashed out is $100,000 x 80% = $80,000.
What exactly is ‘Refinance’
Refinance means transfer the mortgage from ‘A bank’ to ‘B bank’ to cash out the appreciation part. It is a common practice on the market. One possible reason is that B Bank currently has lower interest rate than ‘A Bank’, and customers want to switch to low interest banks to reduce monthly loan repayments.
As time passed by, some banks’ products and interest rates become less competitive due to the RBA cash rate adjustment and the change of Standard Variable Rate. On the contrary, other banks will introduce new policies, products and lower interest rates to attract more clients to take up more market share.
In general, the bank will follow the RBA cash rate adjustment. But the amount is determined by the bank itself. For example, if the cash rate drops 0.25%, some banks will lower the interest rates by 0.25%, while others may only lower 0.2%. Secondly, ‘refinance’ may be due to the fact that A bank does not provide a good revaluation of the property than B bank, and the customer needs to cash out to the maximum to purchase another property or make other investments, so it is necessary to choose a bank which provides better valuation when cashing out.
What’s the meaning of ‘Top up’?
‘Top up’ means that within the current bank, the appreciation part can still be cashed out. This is done through reorder valuation from the bank and the appreciation part will be re-evaluated based on the current market value.
To put it simply, ‘internal refinance’ can be considered as a type of ‘top up’ and all being cashed out without replacing the bank. The difference is that ‘internal refinance’ will close the existing loan account and re-open a new Loan account. This is aimed to customers who have split loans and want to make account integration more manageable. This allows the offset account playing the biggest role, reducing the possibility that the offset account is not linked to the new loan account.
What’s the choice, ‘Refinance’ or ‘Top up’?
It still requires a specific analysis case by case according to the needs and purposes of the clients. As is known to all, fees may apply when refinancing from ‘A bank’ to ‘B bank’. In general, ‘A bank’ will have discharge fees or penalty rates. Discharge fee are generally not too much in large banks, around $350 or so, while smaller banks may charge more. The ‘Penalty rates’ are for those who have fixed loans, for example, the customer has 3-year fixed rate (that is, no matter how the bank interest is adjusted, 3-year fixed rate remain unchanged within 3 years) and now there is one year left. In the current period, the floating interest rate is much lower than the 3-year fixed interest rate, so the client wants to change from a fixed interest rate to a relatively low floating interest rate. Whether change a bank or not, penalty rates apply if terminating the contract. Therefore, it depends on whether the client’s current breaking cost will be less than the reduced repayments after the termination of the fixed contract.
For example, Mr. Zhang has a 3-year fixed interest rate at 4.95%, the loan amount is $500,000, and there’s one year left. The current floating interest rate is 4.15%. Assuming the breaking cost is $1000, so if Mr. Zhang decides to terminate the contract, the loan repayments is $500,000 x 4.15% = $20,750. If continuing the contract, Mr. Zhang’s loan repayments is $500,000 x 4.95% = &24,750. Then terminating the contract can bring $3000 benefits (24750-20750- breaking cost 1000= $3000). In this circumstance, it would be better for Mr. Zhang to terminate the fixed contract.
So, how much is the breaking cost? It differs from bank to bank and it is determined by the factors like bank’s funding cost, client’s loan amount and remaining terms etc. If you want to know the exact amount, you should consult the current bank and the breaking cost changes for each period.
In addition, there is no need to go to other banks for cash out if the products in current banking are still relatively competitive. It will be easier to do ‘Top Up’ directly at current bank in order to save time, and no discharge fee applies. Also, sometimes clients are used to online banking or bank facilities of the current bank, it is troublesome for them to change.
Lastly, banks normally have promotions in order to attract clients and the most cost-effective way is refinance cash rebate. From the perspective of the clients, bank will provide cash rebates to cover losses caused by refinancing.
For more information, please contact VIP Mortgage Solutions.