Everyone wants to pay less on their mortgage and refinancing is one strategy that can help lower your interest rates, but is it worth it? We take a look at how you can get the most out of refinancing.
Generally, people refinance to negotiate a better deal on their home loan and pay it off sooner. Depending on your situation, you should be able to save money by taking advantage of lower rates or new products that were not available when you first negotiated your home loan.
To put this into perspective, let’s say you took out a $300,000 loan at 7.5% over 30 years with monthly repayments of $2,098. If you refinance to a new loan at 4% you could save $239,543 ($665 per month) over the life of the loan by making the minimum repayments of $1,432 per month.
Once you have refinanced, if you continue making the same minimum repayments as your previous loan ($2,098 per month) you will potentially save $346,912 and pay off your mortgage 165 months early.
Make it work for you
Take advantage of your refinance loan by:
- Consolidating debts: Home loan interest rates are often lower than those of other forms of credit, so you can save money by consolidating debts such as credit cards or personal loans into your mortgage. Beware, however, paying off a short-term loan over a longer period will likely incur extra interest and fees over the longer term. Put money saved from consolidating your debts into your mortgage as if you were still repaying the other debts to reduce the overall debt faster.
- ‘Splitting’ your loan: Nominate a portion to be charged at a fixed rate of interest for a set period of time, with the balance charged at a variable interest rate. When the fixed rate period ends, the loan reverts to the variable interest rate. You will benefit from the security of the fixed rate and flexibility of a variable rate loan, and are impacted less if interest rates rise.
- Having an offset account: The balance of your offset account is subtracted from the remaining principal amount before interest is applied, meaning you spend less on interest over the course of your loan.
- Make extra repayments: Any repayments made on top of your regular repayment will save money by reducing the amount of interest you will pay.
When should you consider refinancing?
Life brings change and your mortgage needs to keep up – maybe now you have a partner, a young family, a new job that pays more or have become empty nesters with extra cash on your hands. If the terms of your current loan do not allow you to pay more (or less) on your principal amount, it could be worth considering refinancing into a more flexible arrangement.
Refinancing or loan switching can save money but you might incur costs such as exit and establishment fees, government charges and administrative or legal expenses. These costs need to be weighed against the benefits to determine if you will save in the long run.
Before you make any decisions, be clear on your reasons for refinancing. It is also a good idea to speak to an experienced mortgage broker or financial expert to ensure you are making the right move for your financial situation.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
Louisa Sanghera is a Finance Broker for Residential Mortgages, Vehicle and Asset Finance, Commercial Lending and Budgeting and Cashflow Coaching with Zippy Financial.
She has gained more than 30 years in the Banking and Finance Industry, and since founding Zippy Financial, has become a multi award nominated expert in the field of finance featuring regularly in industry press and speaking at finance and investment seminars across the country.
Louisa J Sanghera is a credit representative (437236) of BLSSA Pty Ltd AC 117651760 (Australian Credit Licence No. 391237).