There are many reasons why people consider refinancing their home. The top three are to save money, fund a renovation, or to buy something. Refinancing and/or switching your loan can help you to save fees, lower your repayments, potentially consolidate debt, yet above all ideally put yourself in a more suitable loan product to suit your current personal circumstances. Leveraging the available equity within your property by refinancing to renovate, for example by adding a room to your home, installing a pool or other home upgrades. You can also refinance so that you can fund an investment purchase in order to avoid having to tap into your own personal savings. Regardless of your rationale, it’s important to seek advice and understand the opportunities and implications when it comes to refinancing.
What is Refinancing?
Refinancing your home loan essentially means changing your existing loan for a new and improved loan. Quite commonly this is with a new bank or most certainly a new bank product. People often look to refinance their home loans because they are either likely to get find a more suitable loan product or are looking to increase their existing loan with the option to withdraw some of their home equity for purchases, renovations, investments, etc.
You can refinance your home loan from any one of the myriad of lenders available. It does not necessarily need to be your existing lender. Whilst previously banks tended to offer some form of reward for customer loyalty, unfortunately this tends to no longer be the case. In fact, lenders tend to provide better offers to new customers rather than rewarding existing ones.
Impact of Interest Rate Changes
Every man and their dog seems to be talking about interest rates, particularly due to the recent RBA cuts to interest rates. Regardless of where you are hearing it from, it’s important to understand why refinancing could make sense for you. As mentioned previously, lenders commonly offer better deals to new customers, this can result in lower home loan repayments, greater borrowing capacity and the potential impact of varying interest rates. Let’s take a look at this mortgage repayment comparison table:
| $ 350,000.00 | $ 400,000.00 | $ 450,000.00 | $ 500,000.00 | |
|---|---|---|---|---|
| 3.75% | $1,620.90 | $1,852.46 | $2,084.02 | $2,315.58 |
| 4.00% | $1,670.95 | $1,909.66 | $2,148.37 | $2,387.08 |
| 4.25% | $1,721.79 | $1,967.76 | $2,213.73 | $2,459.70 |
| 4.50% | $1,773.40 | $2,026.74 | $2,280.08 | $2,533.43 |
| 4.75% | $1,825.77 | $2,086.59 | $2,347.41 | $2,608.24 |
| 5.00% | $1,878.88 | $2,147.29 | $2,415.70 | $2,684.11 |
The impact of compounding interest is significant and should not be underestimated. If you were to find the option to switch to a lender with an interest rate 0.75% lower than your current lender, on a $500,000 mortgage you would not only save $218 per month, but a whopping $78,425 over the lifetime of the loan.
Quite often lenders tend to only look at the short term implications of a loan – how will you meet your monthly repayments? Will this fit within your budget? However, the long-term impact of interest is significant and should never be underestimated. The ASIC MoneySmart refinance calculator is a fantastic tool that helps you determine just how much your loan will cost you, and therefore the potential impact of a different lender.
Regular home loan ‘health checks’
More than likely you have either read, or heard about, the “Barefoot Investor” and his various books. He has been declared as one of the most trusted independent financial experts. Within his book “The only money guide you’ll ever need” one of his “date night” tasks is to assess and compare your insurance options.
Your loans should be reviewed, compared and potentially changed on a semi-regular basis as well. Whilst car insurance and house insurance should be reviewed at least annually, your home loan is probably best reviewed bi-annually or every three to four years at maximum. Why? Because each lender has an extensive list of fees, and amongst those is an Exit Fee. It’s important to take into consideration the impact of the exit fee or break costs – and any other refinancing fees – alongside the potential ‘savings’ provided by refinancing.
Take the time to do the calculations – it is well worth it. Your mortgage broker will help you assess the various options available, the impact on your short-term finances, and what advantages/disadvantages changing lenders may have.
Fixed Interest Rates
Quite often home loans come with the opportunity to “lock in” an interest rate for a period of time. This is referred to as a “fixed interest rate period”. It is one of those items that was of incredibly high importance when you were first signing up for your loan, but more than likely you’ve forgotten about it. Don’t!
Lenders prepare fixed rates based on their property market and financial market predictions. And more than likely their predictions are likely to be wrong. Sometimes this can be to our advantage, and at other times it can be to our detriment. In Australia it is quite common to have a fixed rate term between one and five years, and when that period ends your loan will change back to a variable rate. However, that standard variable rate typically does not have any discounts.
Remember when we said earlier in this article that lenders tend to provide better deals to new customers rather than their existing ones? This is where it can have a massive impact on your finances, mortgage repayments, and the lifetime loan amount.
Paying off your home loan earlier
Quite often you can reduce your home loan repayments by refinancing your home loan. Unfortunately, the average Australian tends to “pocket the difference” and instead of continuing repayments at the same rate we were previously, we drop to the “must pay” amount. This can have significant implications on the duration of your loan and the lifetime repayment amount.
Consider this. Your current mortgage repayments are $1,000 a fortnight. If you were to switch to a new lender, your repayments drop to $950 per fortnight. If you were to maintain the payments at $1,000 a fortnight (because if you have been able to afford it in the past, why wouldn’t you?), then you are basically paying off an extra $50 a fortnight. This is the same as putting in an extra $1,300 per year. Whilst this doesn’t seem like much, you have the potential to save over $30,000 and almost 18 months in repayments based on a $500,000 loan. Don’t believe me? Here’s a screenshot from the ING “Extra Repayment Savings Calculator”.
TL;DR – Too long, didn’t read?
That’s fair enough, time is precious and we understand that. The bottom line is that performing a health check on your home loan should be a regular task. Mortgages are not a “set and forget” premise, you need to review and reassess not only inline with the current financial climate, but also with your personal financial situation. Take the time to discuss your options with your mortgage broker and see if refinancing your home is a good option for you.
