How refinancing your home loan could save you big

How refinancing your home loan could save you big

If 2020 was the year of plummeting home loan rates, 2021 may be the year you finally consider refinancing your home loan.

Refinancing has increased over the last year, with the latest ABS Lending Indicator data showing 237,632 homeowners switched mortgages since the start of Covid-19 in March 2020.

This is because thousands of Australians are looking to shave tens of thousands of dollars off of their mortgages, and potentially cut down the years they’re repaying their balance.

In a time when every dollar counts for household budgets, it’s no surprise so many Australians are looking to get a little breathing room from their mortgage repayments. Let’s take a look at just how refinancing may help your finances in 2021.

5 reasons refinancing may save you big

1. Get a lower interest rate

One of the biggest ways you may be able to save by refinancing is by switching to a lower rate home loan. This is because by lowering your interest rate you’re not only lowering the amount you’ll repay each month, but you’re lessening the total interest you’ll pay over the life of your loan.

For example, John is on a 30-year, $500,000 mortgage and paying a rate of 3 per cent. His current monthly repayments are $2,371 a month.

He decides to refinance to a new lower rate loan of 1.8 per cent after five years and keeps the same loan term remaining. This reduces his monthly repayments to $2,071 a month. This now saves him $300 a month, or $3,600 in a year.

These savings are the equivalent of paying his energy bills or a weekend away with the family.

Refinancing on a $500,000 home loan

  Interest rate Monthly repayments Total repayments over loan term
Original loan 3.00% $2,371 $711,317
Refinanced loan 1.80% $2,071 $621278
Difference 1.20% $300 $90,039

Note: Figures based on hypothetical loan example that does not factor in fees or ongoing rate changes.

2. Pay fewer fees

It’s not just the interest rate that will sting your household budget, but the ongoing fees associated with a mortgage too. Even if you have a relatively low interest rate, ongoing fees can add up over time.

Depending on your lender, the fees you pay may include:

  • Monthly service fees
  • Annual fees
  • Extra repayment fees
  • Late payment fees
  • Redraw fees

With annual fees alone skyrocketing as high as $400 in some cases, refinancing to a new home loan that charges fewer, or no fees, may save you some serious cash.

3. Increase flexibility and features

Another popular reason Aussie borrowers refinance is to add greater flexibility and features to their home loan. This means to refinance to a loan that offers helpful tools such as:

  • An offset account
  • A redraw facility
  • A line of credit
  • The ability to make extra repayments
  • The ability to split your loan repayments

Generally speaking, when you signed up to your first mortgage you may not have been offered the most competitive loan on the market. After all, your deposit may not have been over 20 per cent and all of your savings were realistically going into the property purchase.

This means the loan you’re on may be a more basic package and not offer you the kinds of helpful features listed above.

And some of these helpful features can help you to shave thousands off your mortgage as well, such as making extra repayments or putting your savings into your offset account to lower your monthly repayments.

4. Take advantage of deals

At any given moment there are a range of home loan deals available. These deals may come in the form of cashback, waived upfront fees, waived lenders mortgage insurance or even bonus frequent flyer rewards points. If you’re considering refinancing, another way you may save big is by switching to a home loan offering any one of these generous deals.

RateCity research shows that as of February 2021, there are 21 cashback deals on offer specifically for refinancers. These range between $1,000 and $5,000, depending on the lender and the size of your mortgage.

Cashback deals for refinancers

Lender Refinance Cashback
Bank of Melbourne

$4,000

86400

$2,000

Bank of China

$2,288

Bank of Queensland

$3,000

BankSA

$4,000

BankVic

 $1,500

Bankwest

$2,000

BCU

$3,000

CBA

$2,000

Citi

$4,000

Credit Union SA

$2,500

CUA

$2,000

MyState Bank

$2,000

NAB

$2,000

People's Choice Credit Union

$4,000

Police Bank

$2,000

RAMS

$4,000

Reduce Home Loans

$5,000

St.George Bank

$4,000

Virgin Money

$3,000

Westpac

$3,000

Source: RateCity.com.au. Data accurate as of 02.01.2021.

One perceived barrier to refinancing can often be the upfront costs involved in switching loans, including application fees and valuation fees. Cashback deals help to reduce these upfront costs and encourage borrowers to refinance. You may also be given the option to have the cashback deal given to you in the form of cash or even gift cards to an affiliated retailer.

5. Access equity in your home loan

After a few years of paying off your home loan, you may have saved up a little equity. Refinancing may also allow you to access this equity, which you may use for home renovations, paying for a wedding or a holiday, or even to pay off debts.

Equity is the difference between your property’s value and how much is owing on your mortgage. For example, if a property is worth $700,000 and your mortgage balance is $400,000, the difference of $300,000 is the amount of equity you have to work with.

When it comes to refinancing, equity may be used as security to allow you to borrow more money. The extra money you borrow may be provided as a line of credit or a lump sum.

Be aware that when you borrow more money, you’ll be adding to your mortgage size. This means you’ll typically end up paying more interest over the life of your loan, and potentially increase your ongoing repayments. So, while you may be saving money by paying off your debts today, or avoiding a personal loan for renovations, the long-term interest charges may outweigh the short-term savings.

Common refinancing traps

Before you refinance your home loan to save money, keep in mind the following common refinancing traps:

  1. Extending the life of your loan. Many homeowners make the mistake of extending their loan term when refinancing and getting stung by interest repayments. For example, you may only have 15 years left on your mortgage, but when you refinance, the lender adds another 20 to your loan term.
  2. Fees. There will always be some costs involved with switching a home loan, such as discharge fees if you’re leaving a fixed-rate term early, application fees and more.
  3. Packaged products. Are you on a package home loan? Don’t forget you may need to unbundle these packaged products, such as your credit card or an offset account, before you refinance your mortgage.

Lowest interest rates on the market

Considering refinancing to a lower rate lender? Take a look at some of the current lowest interest rates on the market.

Owner-occupier, variable, principal & interest

Lender Product Interest Rate Comparison Rate
Reduce Home Loans Rate Cutter Home Loan

1.77

1.83

Homestar Finance Star Gold Home Loan

1.79

1.84

Pacific Mortgage Group Standard Variable Home Loan

1.89

1.89

Source: RateCity.com.au. Data accurate as of 02.01.2021.

Owner-occupier, fixed, principal & interest

Lender Home loan Interest Rate Comparison Rate Fix term
UBank UHomeLoan

1.75

2.22

3 years

HSBC Package Fixed Rate Home Loan

1.88

2.98

2 years

Homestar Finance 2 Year Fixed Rate Special

1.88

2.26

2 years

Source: RateCity.com.au. Data accurate as of 02.01.2021.

Investor, variable, principal & interest

Lender Product Interest Rate Comparison Rate
Northern Inland CU Dream Value Package Investment Loan

1.89

2.29

Freedom Lend Freedom Variable Investment Loan

2.27

2.27

Homeloans.com.au Low Rate Home Loan - Prime

2.29

2.31

Source: RateCity.com.au. Data accurate as of 02.01.2021.

Investor, fixed, principal & interest

Lender Home loan Interest Rate Comparison Rate Fix term
Northern Inland CU Investment Loan

1.99

4.17

4 years

RACQ Bank Choices Fixed Investment Loan (QLD only)

2.09

4.21

3 years

UBank UHomeLoan

2.09

2.6

3 years

Source: RateCity.com.au. Data accurate as of 02.01.2021.

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Learn more about home loans

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments.