September 13, 2018
One of the biggest reasons homeowners refinance is to save money. If you switch to a lower rate, you can lower the amount of interest you’ll pay on your loan. You can also lower your monthly repayments when you add time to your mortgage – although with a longer term you may end up paying more overall.
The reality is, refinancing could save you a lot of money. However, whether you save in the short term or the long term, or both, depends on the details of your new loan and how much it costs you to refinance.
When you refinance, you end your current loan contract and begin a new one, switching from one loan product to a different one. The new loan takes care of the debt from your existing mortgage. You can change to a new lender or you can refinance with your current lender and switch to a new loan product.
When rates drop below the interest rate you’re paying on your current mortgage, or if you may qualify for a lower interest rate now because your borrowing profile improved enough, you may be able to refinance to a lower rate.
When you switch to a loan with a lower interest rate:
- Your monthly repayments will decrease
- You could save thousands (to tens of thousands over time) by lowering the amount of interest you’ll pay on your loan
- You may be able to pay down your loan faster, which could help you save even more.
Take for example the following savings comparison: For a loan amount of $450,000, switching from an interest rate of 4.2% p.a. down to 3.72% p.a. could save you $125 every month. Over the course of a 30-year loan, you could save a total of $45,000! How’s that for helping you sleep at night?
In the short term, you could also save by refinancing to a mortgage period that is longer than the amount of time you have left on your loan. For example, if you took out a 25-year mortgage 5 years ago and you refinance today to a new 25-year loan, you’ll end up making mortgage repayments for a total of 30 years. You would have been paying down your loan over the past 5 years so you’ll have a smaller balance than you did when you took out your original mortgage, which is now stretched out over 25 years with the new loan.
Be careful when refinancing to avoid adding extra years to your loan if your goal is to reduce the overall cost of your loan and to pay it off as quickly as possible.
If you are struggling with your household budget, however, getting your monthly repayments reduced with more time to pay off your mortgage can help you manage your finances better. Even though you may pay more in the long run, you may prevent financial stress that could lead to late payments or increased credit card debt.
You may have other reasons why you may want to refinance, which can help you save money in other ways:
- Debt consolidation: If you have a lot of debt from credit cards and personal loans, you can consolidate these debts into your home loan when your refinance. You’ll have to borrow enough to cover the debts you want to consolidate as well as the remaining balance on your mortgage. Compare the amount you’re paying now on all your accounts to how much you’d pay each month on your refinanced mortgage. This will show you how much you could save per month.
- Renovations: Planning a renovation? Instead of taking out a personal loan to cover the costs, you can refinance your mortgage to include enough money to pay for your renovations. You can also use the money for other things like a much-needed holiday.
When refinancing, you also have to factor in the costs involved to make the switch, such as your loan application fee and the cost of a professional valuation. Don’t forget, if your new loan has a high Loan-to-Value Ratio (LVR), generally anything above 80%, you’ll have to pay Lender’s Mortgage Insurance (LMI) when you refinance. Also, check if your mortgage contract has any break fees or exit costs.
Paying LMI or having to deal with costs like break fees can make it less worthwhile to refinance. You’ll want to do a thorough check of your estimated savings versus the costs involved to find out if you could save by refinancing.
To estimate how much you may be able to save by refinancing your home loan, factor in the interest rate difference, the length of your new mortgage, loan account fees, and any associated costs of refinancing. You can use our free tool to help you see what you could save each month with lower repayments and how much you could save overall.
Once you have an idea of how much you could save by refinancing, you can take the next steps, comparing lenders, researching loan products, and looking at what exactly you want to get out of your new loan. If you need any help estimating your savings or comparing home loan products, our team of refinancing experts are happy to help.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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