Your home loan is likely to be your biggest expense – so I reckon a bit of effort to potentially save thousands is worth it. That effort could be asking for a rate review (making a phone call to your lender), or refinancing. Let’s look at refinancing...
What is refinancing?
Refinancing is the process of replacing an existing loan with a new one – your existing home loan is paid off and replaced with a new one.
How can it help me save?
If you were paying 2.75% interest on a principal and interest home loan of $600,000 for a 25-year term, your monthly repayments will be *$2,768 per month. However, if you re-financed to a loan with a rate of 2.59% (so that’s 0.16% lower), you’d pay just *$2,719 per month.
It might not seem a lot but over the years, that saving adds up.
But another option when refinancing is to get a loan with a lower interest rate and continue with the same monthly repayments. This approach will see you pay less interest and pay off your mortgage faster – win-win!
Features to consider
If you’re considering refinancing, it’s a good idea to think about which features are important to you before starting a search for a lower interest rate.
Variable rate or fixed rate. A fixed rate gives you more certainty over the longer term. A variable rate fluctuates, so you’ll save when it’s down but there’s a risk it will rise.
Offset account. Use an offset balance against your loan balance in case you need it, and to save interest.
Repayment flexibility. Repaying a loan fortnightly rather than monthly can make it easier to fit in your budgeting plans.
Early payout. You may want the option of paying a loan out early with minimal penalty.
Weighing up the costs
There’s likely to be costs associated with refinancing and it’s important to factor these into your decision-making.
For example, if you have a fixed-rate loan, you might have to pay a break fee. For a new home loan, you may have to pay an establishment fee and ongoing administration fees could be higher than you’re paying now.
You can use an online mortgage calculator to work out what repayments will be for different loan amounts, at different interest rates. You can also compare fees and charges to ensure they won’t offset any savings in interest over the life of a loan.
The MoneySmart website has a useful mortgage switching calculator to help you assess overall costs, and there's a lot of other useful information.
Need more help?
Refinancing is a serious financial decision with a number of variables to consider, so consider using a good mortgage broker.
They understand the type of loan that may work best for you, how much you can borrow, explain extra features and help you compare different lenders. As well as doing the legwork for you, they can guide you through the refinancing process.
If you’d like a referral to a mortgage broker, get in touch – at Nutshell Money, we love to make money simple!