Refinancing at the right time can save you $63,000



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October 8, 2010

Remember that old saying “a change is as good as a holiday”? The same philosophy can often be applied to your finances. For some mortgage holders, staying with your original loan is not always the best solution. As we’ve found, it could cost you an extra $63,000 to stick with the same lender.

Refinancing your mortgage can be a great option for those whose circumstances may have changed since applying for the loan, such as welcoming another member to your family or a decrease in your salary. Other reasons why someone may refinance their home loan can include:

  • when interest rates drop;
  • if you are struggling to meet your current repayments;
  • if you want to access the equity in your home to purchase another property, such an investment property;
  • to consolidate your credit card and other debts into the one loan;
  • get a better mortgage with extra features and flexibility; and
  • borrow additional funds for whatever reason such as renovations or to purchase a boat.

When is it 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 loan which 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.

 

 

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