July 16, 2018
With the cash rate so low at the moment, and having stayed there for a record breaking 22 consecutive months, many of the lenders have finance available at some new low rates. And in this financial environment, it’s likely you’ve heard a lot about refinancing.
The big question is: does refinancing really save you money?
What is refinancing?
Refinancing involves replacing your current home loan with a new home loan, usually with a new bank or lender. The process is the same as when you first put your home loan through, meaning it can be a long process.
You will still need to provide all the same documentation and will be required to fulfill all the new lenders standards and pre-approval process.
How do people save money through refinancing?
There are a number of reasons people refinance their home loan. The most common reason is that people want to save a bit of money on their repayments. There are a number of ways you can potentially save money through refinancing.
As a guide, if you can trim 0.5% from your home loan rate, refinancing is likely to put you in front financially.
But be sure to crunch the numbers for your particular situation or ask your Mortgage Choice broker from Bunbury & Margaret River to do the sums for you.
Getting a lower rate
You could potentially save money by refinancing to a home loan with a lower rate. If you haven’t checked your home loan rate in the last 2 years, it’s likely that there are some lower rates available to you - especially in this low rate environment.
Do some quick sums with our home loan calculators: how much could a lower rate save you?
Consolidating your debt
You can use refinancing to consolidate all of your smaller debts and roll them over into your home loan, which will have a lower rate than you car loan, credit card or personal loan. This can not only save you considerable money in repayments, but can make your finances simpler and easier to manage.
Taking advantage of better loan features
There are lots of great loan features out there that you could benefit from through refinancing. You might be able to refinance to a home loan with multiple offset accounts to save on interest or be able to pay it off in lump sums without incurring an additional fee.
In regards to an offset account, if the linked account has a balance of $10,000 and your loan is worth $300,000, interest will be based on a loan of $290,000 ($300,000 less $10,000). This makes an offset a great way to put personal savings to work to pay off your loan faster.
Be aware, offset is a feature that may not be available on low rate basic loans so you need to weigh up if the value of your savings will be sufficient to make up for a higher loan rate.
Changing the loan terms
Sometimes people like to change the terms of their loan. Switching to a longer term loan could save you money on repayments in the short term, and shortening your loan term could see you paying your loan off faster and paying less interest over the term of your loan.
Let’s take a look at an example of refinancing:
Here's an example. Let's say Sue has a $300,000 loan repayable over 30 years. Her current rate is 5.9% and her monthly repayments are $1,779.
If Sue can refinance to a loan with a rate of 4.5% with a rate reduction of 1.4% she can lower her repayments to $1,520 a saving of $259 each month.
Looking at the cost side of things, we'll assume Sue will pay $1,500 to refinance her loan. In this case it would take about 6 months ($1,500 divided by $259) for Sue to claw back the costs through the savings she makes.
That's not a bad time frame. If it was to take several years to recover her costs, refinancing may not be worthwhile.
That doesn’t take into account some of the savings or benefits Sue could have from updating other features. Should Sue change her loan term to 20 years, but on a lower rate she would end up paying more ($1,897) but would shave 10 years off her home loan repayment.
Refinancing to consolidate debt
Refinancing does cost money
While saving money through refinancing might sound great, keep in mind that there are some costs that come with refinancing.
Exit fees from your current home loan along with Lenders Mortgage Insurance, loan application fees and the cost for the new lender to value your home are all expenses that you could incur through refinancing.
Sit down with a mortgage broker you trust to make sure that the potential benefits of refinancing outweigh the costs.
The good news is, having a trusted Mortgage Choice broker to help you find the right new home loan and through the refinancing journey doesn't cost you anything.
Our free Home Loan Health Check
The Mortgage Choice team in Bunbury, Margaret River & surrounds offer a free Home Loan Health Check to see if perhaps refinancing could help you. It only takes a short time and could save you money!
It’s a great effective way to review your home loan, if you haven’t in the last 2 years.
Book your free Home Loan Health Check with our team today on 0408 591 979 or click on the Contact Us button at the top of the page.
