Refinancing an existing loan isn’t without its challenges, but the bottom line is: it’s worth the small amount of effort involved, especially when interest rates are so low and the chance to save big bucks is high. Fortunately, Your Mortgage is here to ease you into the planning stage and make the process of refinancing as smooth and straightforward as possible.
Most people choose to refinance for a specific purpose: to save money on interest, release some equity or consolidate some debts, for instance. It’s not worthwhile going down the path of refinancing your home loan if you aren’t first clear on how much money you’ll save by doing so.
On the back of mounting uncertainty in the Australian economy, which is already growing below trend, the Reserve Bank of Australia slashed interest rates in March 2020 to a record low of half a per cent.
This in itself should sound a warning bell in your head: the mortgage market is moving. So, it’s time to have a go at the handy loan calculator to fill in potential new interest rates and rejig the numbers.
Looking at the market as of March 2020, variable interest rates for a $600,000 home loan range from 2.78% to 3.09% on owner-occupied loans, and 3.19% to 3.39% on investment properties.
Let’s keep assuming you have a $600,000 house on a 30-year loan term. If the interest you’re currently paying is 3.5%, you’re spending around $2,695 per month.
Now if that rate were to come down to 3.25%, you would saving $80 per month or about $1,000 per year.
But, it’s what you do with those savings that really matters.
You can keep your payments at the same level you’re paying now and reinvest the $80 back into your mortgage. This way you’ll reduce your loan term – we’ve run the numbers, and this will shave one year and five months off your loan term. Better still, you’ll save $18,780 in interest payments.
That forever home can be truly yours in less time and money; use our extra and lump sum payment calculator to calculate how much you could save in your own scenario.
What are the other benefits of refinancing?
Beyond lowering your monthly payment, getting rid of private mortgage insurance is another big reason why people refinance their home loans.
Any time someone puts less than a 20% down payment on a home, they’re required to pay an additional upfront fee for lender’s mortgage insurance (LMI).
You may be able to get a partial refund on some of your LMI if your house has appreciated in value since you took out the mortgage, or you’ve paid down the loan significantly to around 80% of the home’s value.
Refinancing also means you can get access to your home equity, and there are a number of ways to take advantage of this. By unlocking $20,000, $50,000 or more, it may help you fund the deposit on an investment property.
Using equity to renovate your home is another great option, because it can help increase the value of the home and maximise its resale potential in the future. For instance, upgrading the kitchen can add value and appeal, while adding a swimming pool can increase a home’s value as well.
Debt consolidation is another win for people who choose to refinance (dependent on their circumstances). Normally, short-term debts attract higher interest rates – personal loans debts, credit cards, store cards etc – but by refinancing, you consolidate these into a single loan and make one regular payment instead of multiple ones. The mortgage interest rate of around 3-3.5% is far lower than these consumer debts, which often have interest rates of 20%-plus.
However, to do this effectively, you need to make sure your loan is structured correctly, otherwise it may be the case that you’re paying more in interest charges and fees in the long term.
We’ve saved the best for last, too. Of course, there’s the good old perk for home loan refinancers to make a switch to a new lender and get a cash back incentive.
Imagine receiving $2,000-$4,000 to spend on anything you like? A big screen TV? A fun holiday getaway? What would you spend your cashback incentive on?
Potential drawbacks of refinancing
You understand the benefits of refinancing – but what about the drawbacks?
Before you consider refinancing, it’s a good idea carry out a health check of your finances and consider how much of your loan term is left. Your mortgage broker can help you with this, if you’re not even sure where to start!
It might not be worth making a switch if the savings to cost ratio is at par with one another. For instance, if the refinancing costs (which include but are not limited to exit and break fees, loan approval fees and solicitors fees) outweigh the interest rate savings, then refinancing may not be for you.
It’s useful to consult with a mortgage broking and lending specialist in case you have any doubts about costs, because at the end of the day, you want to refinance to avoid being under financial burden. That’s what we’re here to do: answer any questions and help you navigate the process of refinancing with as little stress as possible.
At the end of the day, refinancing may help you adapt your current situation and give you the flexibility and finances to take advantage of a better offer or lower interest rate. Those much-needed home repairs that you’ve been putting off or that longed-for holiday could finally be in reach.