Mortgages, Refinancing & Loans
Mortgages & Refinancing
The two most common reasons for refinancing usually occur when:
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You may have reviewed your current home loan or investment property loans and be considering refinancing, perhaps with a different financial institution;
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You may consider refinancing for different reasons, such as wishing to increase your borrowings for a particular purpose, or you may be wishing to take advantage of a lower interest rate.
Deciding to go with another financial institution
Your decision to go with a different financial institution is one that will involve balancing the cost of refinancing against the savings available through a lower interest rate. In any case a refinance is going to result in costs and accordingly it will always be sometime before you reap the benefit of lower interest rates to the extent that you will have recouped those costs.
Refinancing & Interest Rate Changing
You may be wishing to refinance to get out of a high interest loan and into a loan with a lower interest rate. To do this you will need to refinance in order to draw on equity that has grown due to the appreciation of the value of your property, you may wish to refinance to get a loan with better features such as fixed rate options, split loans, line of credit type facilities, redraw facilities and the like. If the cost of refinancing seems prohibitive then an alternative is to approach your bank and enquire as to whether they will agree to vary your loan terms to give you those things that you are seeking from a refinance.
Clearly refinancing to take advantage of lower interest rates is more likely to give you a good result if you intend to keep the property for a longer period. You will be unlikely to get any benefit from refinancing if you end up selling soon after the refinance.
Costs involved
Before committing to a refinance you should insist that you be provided with a detailed costing. Some of the costs will be incurred in discharging your existing loan as you may be liable for a discharge fee, legal costs, early repayment fees as well as interest break costs. Costs can be considerable if you have a fixed interest loan and you are paying out the loan at a time when interest rates are lower as your loan is likely to have provisions which require the application of a formula to reimburse the lender for their lost interest.
The new financial institution will have numerous fees including an application fee, valuation fee, legal costs, title searches, registration fees and they may insist on mortgage insurance, a survey, a council building certificate and perhaps all the property enquiries.
If you are considering refinancing an investment property then there may be some effect on your tax situation. In those circumstances it is important that you refer the question of refinancing to your tax adviser or accountant.
Loans
Regardless of your reason for refinancing you should be prepared to consider the loans offered by a number of financial institutions. You may wish to engage a mortgage broker to assist you in this regard. A loan officer of the financial institutions and a mortgage broker should be able to explain to you the different types of loans such as fixed interest, interest only, principal and interest, variable rates as well as the different "honeymoon periods" that are sometimes offered. You must be aware that obtaining a fixed interest loan can backfire if rates fall. Alternately you will make considerable savings if you obtain a fixed interest loan for three or five years at a time when interest rates rise.
Stamp duty is payable on loans financing property. There is a concession that may be available to you on refinancing. You should make proper enquiries as to whether the stamp duty concession is available to you before committing to refinance.
Loans can easily become a major source of aggravation for lenders whose initial motivation is often just to help out the borrower. Regardless of whether you are lending to a close family member or to a complete stranger, you should allow sufficient time to properly negotiate and formalise all of the terms of the loan agreement.
Circumstances may arise where you wish to make a loan to assist someone to buy a property, finance their business, further their education, to travel or otherwise assist with their personal finances. While it would seem unnecessary for us to say that all loans should be evidenced in writing, it is very common for us to be engaged by clients to assist them in recovering substantial amounts owed under a loan arrangement where nothing was in writing.
If you are intending to lend money to another person or a company you should be very careful not to commit to the loan without leaving enough time for loan documentation to be prepared, amendments negotiated and original documents executed. You should be careful to stipulate that before you provide the loan amount appropriate documentation must be signed in a form approved by you.
In order to prepare loan documentation you will need to decide on the amount of money that you are lending, called the principal sum. You may negotiate that the principal sum be advanced as a single lump sum or in progress payments, depending on the needs of the parties.
You will also have to have agreement between yourself and the borrower as to whether interest is payable. Some lenders are prepared to give loans to family members interest free. On the other hand we sometimes act for lenders who are lending on an arm’s length, purely commercial basis where the interest rate is at a premium. In all cases we would recommend that interest be expressed in a way that provides for a higher rate of interest if the borrower defaults.
You should also decide whether the money you are lending has to be repaid at a fixed date in the future or whether there are to be repayment instalments of principal during the term of the loan. Some loans are for extremely short periods such as one (1) month. Often we deal with loans that are repayable in three (3) or five (5) years. Occasionally loans to family members are expressed to be repayable or else to be forgiven on the death of the lender. Another alternative is that the loan can express the repayment date as being triggered by an event such as the sale of a property, marriage, divorce, attaining a certain age or it can be repayable on the lender giving twenty eight (28) days notice at any time.
You and the borrower may agree that there is to be only one repayment of principal and interest at the end of the loan. Alternately the arrangement may be that repayments of interest only are to occur at regular intervals throughout the term, or you may require that there be repayments of principal and interest monthly, quarterly, annually etc. Another possible arrangement is that the lender must make repayments of a fixed amount until the loan is repaid. In any case you may wish to consult your accountant regarding the best arrangement. You should take the opportunity to get advice on the tax implications of the transaction.
The borrower commonly pays the legal costs and disbursements of formalising a loan arrangement. The loan documentation should reflect this. However it is not uncommon for loans between parents and children that the parents carry the burden of paying the costs. In the more commercial loans the parties can agree that the legal costs and disbursements be deducted from the principal sum before it is handed over. Similarly the stamp duty payable on the loan documents is normally payable by the borrower.
In all cases of loans it is recommended that the borrower give the lender some security to ensure repayment. The best security of all is a registered first mortgage over real estate. In those cases the lender at the borrower's cost should obtain a valuation of the property. The lender will use the valuation to determine whether there is a safety margin available in the security over and above the principal sum and the interest and costs that will accrue throughout the term of the loan. If you are lending to a company then you may be able to obtain security in the form of a "fixed and floating charge".
A charge over company assets is similar to a mortgage over real estate. If you were lending to a company it would be normal to expect that the directors of the company give personal guarantees that will make them liable if the company defaults. If you are lending to an individual who operates a business then you may wish to take security in the form of a "bill of sale". A bill of sale is similar in nature to a mortgage over chattels, goodwill of the business, debts owed to the business and the like.
Loans can easily become a major source of aggravation for lenders whose initial motivation is often just to help out the borrower. Regardless of whether you are lending to a close family member with no real intention of being repaid, or whether you are lending to someone on a semi-commercial basis with the intention of a reasonable return, or whether you are lending to a complete stranger on a purely commercial arms length basis, you should allow sufficient time to properly negotiate and formalise all of the terms of the loan agreement, you should properly consider the risks that you will not be paid the amounts due to you within the specified term of the loan (or perhaps at all) and you should look carefully at taking proper security to improve your chances of getting something back if it all goes wrong.