March 19, 2018
There are few financial commitments that carry as much weight as your home loan. So it makes sense that we should be checking it regularly.
Refinancing is a fantastic way to not only review your home loan and check that it still works for you but also take advantage of some pretty great benefits.
Here are 5 ways refinancing your home loan could help you:
You could secure a lower rate on your home loan
We’ll start with the popular one first. One of the main reasons people choose to refinance their loan is to get a lower interest rate and put more money back into their pockets instead of paying the banks.
When done correctly, refinancing your home loan could save you thousands over the life of your loan, and free up cash now. With rates sitting low at the moment, now is the perfect time to see if you can save by refinancing.
You could switch between variable and fixed rates
Another popular reason to refinance your home loan is to switch between a variable rate and a fixed rate. With a fixed rate, some want peace of mind. That is, knowing exactly how much their monthly repayments will be without the possibility of it changing is worth a slight increase in rate.
Conversely, you may decide you'd like to take advantage of a lower variable rate as you can accept the risk that rates may rise in future.
To find out more about the difference between variable and fixed rates, check out our MoneyChat video here.
You could be eligible for a home loan with better features
There are some great home loan features around at the moment, and refinancing could help give you some of the features that weren’t available to you before. You might want to switch to a home loan that allows you to make lump repayments without fees or open up an offset account to reduce your interest.
There are some pretty cool boutique features as well, like getting a repayment holiday (a break from repayments), or the loan portability which allows you to take your home loan with you when you move without much hassle.
You could consolidate your debt
Many of us have multiple debts like car or credit card along with our home loan. Often our car and credit card loans have pretty high interest rates, meaning more out of your pocket.
Refinancing could give you the opportunity to merge your debts and potentially reduce the overall interest you’re paying through ‘debt consolidation’, streamlining all of higher interest debts into one lower interest debt and reducing your monthly repayments.
To find out more about refinancing to consolidate debt, check out our MoneyChat video here.
You could release some equity in your current property
You may be thinking about investing in property, renovating your home or traipsing around Europe on that trip of a lifetime. With your current home usually being your most valuable asset, it makes sense to release as much of the value in your home as possible.
Not so long ago, the only way home owners could access their home equity was to sell up and upgrade to another property. These days, home loans are flexible and it’s possible to get access to the equity in your home without having to sell up. Reviewing your home loan can help you see exactly how much equity is available to you, and refinancing can help you access the equity to use for other things.
Cost of refinancing
While refinancing has some amazing benefits, there are costs associated with refinancing your home loan - costs that may outweigh the potential benefits. We’ve included two of the main costs associated with refinancing, but we have put together a complete list here.
Exit fees may apply when you pay out a loan early, usually in the first three to five years of your term. It could be a percentage of the remaining loan balance or it may be a set charge. Check your loan contract for more details. Although exit fees have been banned on new loans taken out after 1 July 2011, they could still apply to loans taken out before this date.
When you refinance, your new lender may charge a range of upfront fees. However, not all lenders charge these fees and some may be negotiable.
Let’s have a look at an example of refinancing
Let’s have a look at a refinancing example using some numbers to better understand the benefits and costs.
Sue has a $300,000 loan repayable over 25 years. Her current rate is 4.4% and her monthly repayments are $1,651.
If Sue can refinance to a loan with a rate of 3.7% giving her a rate reduction of 0.70%, which could lower her repayments to $1,534 - a saving of $92 each month.
This itself is substantial, however, what people often overlook is the compounding effect that this has over time when the savings are re-invested back into the loan (in other words, taking this new loan, but making the original payment from your existing loan).
The Compounding Benefit
The magic of compound interest works to your benefit when paying off a loan, just as it does with savings. If you keep your repayments the same but reduce the rate, then you are making a voluntary overpayment. This consistent overpayment means principal is reduced, lowering the interest on every future payment. This further accelerates the amount owing, which in turn lowers the interest again...and so on, and so on.
Looking at the cost side of things, we'll assume Sue will pay $1,000 to refinance her loan. Interest savings mean these costs are recovered within 9 months. Even if Sue were to add these costs to her loan and then continue to pay the same repayment, using the power of compound interest Sue will save $52500 in loan repayments.
That's not a bad time frame. If it was to take several years to recover her costs, refinancing may not be worthwhile.
The mortgage brokers at Mortgage Choice in Joondalup can help
We’ve gone through the potential benefits of refinancing, the costs associated and a short example. That’s a lot to take in. When it comes time to make a decision about refinancing your home loan, the best suggestion is to sit down with the home loan experts at Mortage Choice in Joondalup to help you go through your options.
Our mortgage brokers will be able to tell you what loan products are going to benefit you the most and the costs that might be associated with them, so you can make an informed decision.