Erin Delahunty - 15 Jul, 2021
With interest rates remaining at record lows, many Australians are looking to take advantage by refinancing their home loan.
Refinancing is when you transfer your current loan to a new lender to get a lower interest rate or improved conditions or renegotiate the terms of your loan with your existing lender to save on interest or introduce more flexibility.
If you’re thinking of refinancing your home loan, here are some tips.
As with any financial decision, it can be a good idea to first sit down and work out exactly what you want to achieve by setting a clear goal to work towards.
Refinancing your home loan may bring benefits in the long term, but also keep in mind you may face higher costs to start with, as loan transfers can involve one-off fees and charges. And are there other options to swapping to another lender? Remember, your time is worth money as well and changing loans can involve a lot of work.
Doing your research or crunching the numbers with a financial professional to find the ideal solution for your situation, are investments that could benefit you a lot more than they cost in the long run.
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How much you can save through refinancing your home loan can vary greatly, especially considering most loans have a variable portion.
But let’s look at a simple example. Say you have $400,000 left to pay on your mortgage. If you currently pay 2.5%, over 20 years, you’d be paying $2130 per month, or $511,107 over the total life of the loan.
If you were to shift to 2.3%, the current average rate in Australia (as of XX date), this would fall to $2101 per month and $504,121 over the life of the loan.
This calculation factored in $10 per month in loan fees. Remember when you do your own calculations to factor in any one-off fees and charges associated with potentially transferring your loan to another lender.
While you might feel more comfortable dealing with your current home loan lender, a little bit of research into what other lenders have to offer might unearth a loan that you like.
The home loan market has a wealth of players and loan products to offer, so it can definitely pay to make the effort to shop around.
Some people find it helpful to approach a mortgage broker, who should be able to give you guidance.
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Interest rates are one of the key factors to consider when refinancing your home loan, as even a small difference in rates can be a big difference over the life of a loan, especially if you’re transferring early in the life of your mortgage.
Consider what fixed and variable rates potential lenders can offer and what mix might suit you. Generally speaking, it’s advisable to go for the shortest loan term you can afford, because you should save in interest payments in the long term.
Also, look for what add-ons other lenders can offer that may cost a little more, but make your finances more flexible. When looking at these, remember to stick to your budget, so you don’t over commit.
One way to lower your debts is to consolidate them all as much as possible into a mortgage that will generally have a lower interest rate than most other loan products.
If you’ve been paying off your loan for a few years, you can access the equity you have built in your property to extend your mortgage, so you pay off the higher interest debt and transfer it into the new mortgage.
This type of loan is called a home equity loan, and they can be taken for just about any legal purpose. It could be an option for your current mortgage and might save you the time and effort of completely refinancing, by everyone’s circumstances are different.
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While there are different factors at play depending on your circumstances, it’s generally believed that fixing your interest rate while they are low, such as in the current market, could mean you save when variable rates go up.
The opposite can also be true if variable rates go down, meaning you’ll be paying more than the lower variable rates. Look at the potential trend for interest rates before making the decision. Fixed rates usually only apply for a set period or to a portion of the loan.
If your loan is all fixed rate for a period, many lenders will penalise extra repayments or requests to shift back to variable before the end of the fixed-rate period. Talk to your potential lender to ask about their fixed-rate loan conditions.
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A good start when looking to refinance is to research the lending market thoroughly so you know exactly what others have to offer and can make a good comparison with what you might be offered.
Another good tip is to ensure you’re talking to someone at your lender who has the ability to make substantive decisions about your loan terms. If you have been with your lender for a while and regularly made your repayments, politely but firmly remind them of this in your discussion.
And if your lender won’t budge, let them know you’re aware of other options out there and that you’re willing to move. Another option is to use a mortgage broker to handle the refinancing process.
A lower interest rate shouldn’t be the only thing you consider when looking at refinancing.
Switching loans to access facilities that give you more flexibility can also make life easier for you. Many lenders offer loan products such as redraw facilities and offset accounts.
Check with your potential lender first, but these facilities are usually only available when you have a variable interest rate for part or all of your loan and conditions vary on how they can be used.
Essentially though, both allow you to make extra repayments, which you can access later, while also acting as a way to reduce interest payments.
eChoice provides a mortgage calculator where you can plug in your specific financial data to get an estimate of what to expect.
You can get a personalised report that lets you know, among other things, your estimated borrowing capacity and expected monthly repayments. The report compares hundreds of loans across more than 25 lenders.
Apart from the potential advantages of moving to a loan that offers a more attractive interest rate or conditions, refinancing can give you the chance to renovate or upgrade your home too.
Apart from the possible savings, you could be adding features and additions to your home that may net you a more profitable sale down the track. You can either use any savings you make from a cheaper loan to pay toward the renovation, or you could use the equity in your property to finance them.
Remember to carefully look at your budget and potential new loan options before you make the move.
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Words by Erin Delahunty
Are you on the lookout to save more on your home loan? Contact eChoice to help you work out your home loan options. With access to 100’s of mortgage products from over 25 lenders, eChoice has the tools to get YOU the right home loan deal.