We’re always looking for ways to help our members save money and improve their lives. So we asked Bessie Hassan, Money Expert at finder.com.au, to explain the benefits of refinancing your home loan.
There are many reasons people choose to refinance their home loan. A lot of the time, though, what people are ultimately looking for is a better deal.
It might be that you’ve been with your current home loan provider for a few years, you’ve checked out what the various lenders are offering, and think there’s a chance you could move to a home loan with a rate and features that better suit your needs.
If you find yourself in this position, refinancing is definitely worth considering as it can bring a range of benefits.
The process is a lot easier than you might think
Even if the benefits of refinancing are clear, the idea of doing research and calculations on a new loan may be daunting. But it’s not as difficult as it might seem, and after just a bit of work, you can soon start reaping the benefits.
Refinancing is something many home owners choose to do, and as a result lenders have processes and expert staff in place to help you along the way. For example, rather than having to do all the research and calculations yourself, a Home Loan Specialist or broker will be able to help you work out what the best options would be based on your circumstances and goals. Mobile lenders are also a great option for busy home owners as they can come to you at a time and place that’s convenient.
Save money with a better rate
Refinancing to get a better interest rate can lower your repayments and shorten your loan term, helping you to own your home sooner.
For instance, monthly principal and interest repayments on an owner-occupier loan of $350,000 at 4.5% p.a. will be $1,945 and the total cost of this loan over 25 years at the minimum repayment will be $583,624. However, at 3.99%, your monthly repayments will be $1,845, saving you $100 per month, $1,200 per year, and $30,000 over the life of the loan.
Calculate your repayments
Of course, you’ll have to factor in any costs that come with switching to a new lender. For example, there may be extra Lenders' Mortgage Insurance (LMI) to be factored in, or break costs when moving from a fixed rate loan to a variable rate loan. The good news is that if your loan is variable (like most consumers) you may not have to pay break costs.
It’s a good idea to add up any potential costs of refinancing, then work out how quickly they could be offset by the savings made with a different rate on your loan. A big long-term saving over the life of your loan could far outweigh any fees you pay at the start.
Example: Following from the previous example, you could be saving $100 per month or $1,200 per year from refinancing your home loan. Moving to a new lender may cost you around $500 in discharge settlement fees and $315 in third-party registration fees. With your savings, you can quite quickly recover the settlement costs and start reaping the benefits of your savings afterwards. Generally, if your savings pay your refinancing costs off within two years, refinancing is worth the effort.
Before switching, it’s also a good idea to contact your current lender to ask if they can offer you a better deal.
Take advantage of extra home loan features
Whether you’re looking to change your loan or your lender, you should compare your current loan features with the features you could get from a different lender.
You may want to look for features that will help you pay off your home loan, such as additional repayment options without penalty, flexibility to make more regular repayments (weekly or fortnightly), offset accounts and no monthly account keeping or annual package fees.
Looking at the additional features on offer can mean that as well as the potential saving from a lower rate, you could pay less in fees and gain greater flexibility.
Access your home’s equity
Refinancing your home loan may allow you to access some of the money you’ve already paid off on your existing loan. You can then use that money to fund your next property goal. For example, it can be a great way to fund home improvements.
Ultimately, refinancing your home loan is not overly complicated or expensive. The benefits of a lower interest rate and better features can outweigh any costs or fees incurred, potentially bringing you huge savings in the long run.
Please note that this is only intended as a general guide in relation to issues you may want to consider when refinancing. It is not intended to be an exhaustive list of all relevant issues and you should take into account your own particular circumstances, and obtain independent expert advice where needed, before proceeding. Rates and savings quoted are indicative only for illustrative purposes.