As much as we often want things to stay the same over time, often our situation changes. Whether it’s a home no longer being suitable for a growing family, your job taking you to a new location, or simply a once-happy relationship breaking down, we often realise that big shifts have occurred in our lives and change is required.
This is no different when you take out a home loan. Price cycles rise and fall, and interest rates oscillate over time as well. Add in changes to your income, and you may find yourself in a completely different financial situation than you were five years ago, for better or worse. When this is the case, it might be time to consider refinancing.
When is the right time to refinance?
The right time to refinance depends on one basic principle: when the difference between your current interest rate and the average market rate is close to 1 percent.
Take Jenny, for instance. Five years ago she took out an introductory rate home loanwhich reverted to her current variable rate of 7.81 percent. With an outstanding balance of $320,000, her monthly repayments over the next 20 years are about $2640, which equates to $633,334 over the loan term (assuming the interest rate remains the same).
If you compare this to the current average basic variable rate of 6.80 percent, that’s 1.01 percentage points less than Jenny’s current rate. By refinancing and switching to a cheaper loan with the average basic variable rate, Jenny could save herself almost $200 per month, and almost $47,280 in interest over the loan term. This doesn’t take into account break costs Jenny may be charged from her old loan and establishment fees for a new loan.
And that’s not even the best deal Jenny could find. For instance, one of the lowest-rate home loans on RateCity is by State Custodians with a comparison rate at 6.46 percent. In Jenny’s case, this is 1.35 percentage points less than what she currently pays with her lender. If she was to switch, she could potentially save herself $262 each month or $62,880 over the next 20 years of her loan (if rates remain the same, not including associated fees and charges).
If your situation is similar to Jenny’s then you should consider refinancing your mortgage as there may be better deals and savings you could be missing out on. The first step to refinancing is to compare home loans online every 12 months to see how your deal measures up to what’s on the market.
What is refinancing, and why do people do it?
Refinancing is the process of taking out a new home loan, which replaces your existing mortgage with a new set of interest rates, terms and conditions. It can be done for a number of reasons:
- Securing a home loan at a lower interest rate
- Decreasing monthly mortgage repayments
- Rolling several existing debts into one package
- Freeing up cash for a large-scale purchase
- Switching to a different lender
- Paying less in mortgage fees
On the whole, it is a process by which people try to save money. Over time, interest rates on a loan may increase, meaning it is no longer feasible for you to continue making these repayments. Or perhaps you have changed jobs and are unable to keep up with the fees. Many Australians have refinanced their home loans to great effect, but it is not a one-size-fits-all solution.
Example refinancing rates:
What are the risks of refinancing?
There can be some upfront costs associated with refinancing a home loan. Firstly, there may be exit fees on your current mortgage. However, these are not incurred if you took out a home loan after July 2011, thanks to a ban on them from the Australian government.
The Reserve Bank of Australia has noted certain mortgage lenders or brokers make commission when they persuade someone to switch from one home loan to another. This is important to keep in mind when considering refinancing, and it may be prudent to find out how your broker or lender is paid.
Furthermore, it is important to use a home loan calculator to determine whether you will actually pay more in the long run. Consolidating short term debts (like credit cards) into a home loan refinancing package could actually result in a higher overall cost, as you may be paying interest on a short-term line of credit over a much longer period.
You may also refinance a 20-year mortgage to one with a 30-year term to reduce monthly repayments, but keep in mind that you will also pay more interest in the long-term.
Is it worth it?
As with any move that boosts your credit, products should be carefully compared, and pros and cons need to be laid out in full. Undertaking due diligence and research is a must, as is using a home loan calculator to work out how much you will pay in both the short term and long term.
At the very least, consider using this guide to give yourself a home loan health check. Doing so can give you the necessary information about how your loan compares with the market, and if your mortgage doesn’t stack up, then talk to your lender about how they can give you a better deal on rates, fees or both.
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