What is refinancing?
Refinancing is the process of replacing an existing loan with a new one. When it comes to home loans, it means your existing home loan is paid off and replaced with a new one. This is different from a second mortgage, where you draw on the equity you have built up in your home.
How can it help me save?
If you were paying 5.37 per cent interest on a principal and interest home loan of $600,000 for a 25 year term. Your monthly principal and interest payments per month will total $3,648.00. If you swapped to a mortgage at a lesser rate of 5.24 per cent, however, you’d pay just $3,602 a month. Over 25 years, that saving each month would add up to 13,800 in total savings.
Another savings option when refinancing is to choose a loan with a lower interest rate but continue with the same monthly payments as you were making on the higher rate. This approach will see you pay less interest and pay your mortgage off faster.
Alternatively, refinancing can help save money by consolidating debt from high-interest credit cards or personal loans into a single home loan with a lower rate of interest.
Features to consider
Most mortgages offer a number of features and benefits. 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 with the market, so you’ll save when it’s down but there’s always a risk it will rise. (In January 1990, for example, the Australian home loan interest rate reached an all-time high of 17.5 per cent.)
Offset account. Cash in hand can be offset against your loan balance until you need to spend it, potentially saving interest.
A line of credit. If you have a lot of equity in your home, a lender might be prepared to offer you a relatively inexpensive line of credit secured against the property.
Repayment flexibility. Repaying a loan fortnightly rather than monthly can make it easier to fit in your budgeting plans.
Early pay out. You may want the option of paying a loan out early with minimal penalty.
Weighing up the costs
There can be costs associated with refinancing and it’s important to factor these in to your decision-making. For example, if you took out your loan before 30 June 2011, the lender might be able to charge you an exit fee for terminating the loan ahead of schedule. If yours is a fixed-rate mortgage, you might have to pay a break fee.
For a new mortgage, you may have to pay an establishment fee and the ongoing administration fees could be higher than you’re currently paying. And if your loan has redraw facilities, there may be a charge each time you take money out of your account.
Do the maths
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 Australian Security & Investment Commission’s MoneySmart website has a useful mortgage switching calculator that can help you assess overall costs.
A broker can help
Refinancing can be a serious financial decision with a number of variables to consider. A good broker can help establish the type of loan that may work best for you, how much you can borrow and any extra features you want. They can then gather information from many different lenders and help assess the costs and benefits associated with each loan.
As well as doing the legwork for you, they can guide you through the refinancing process and apply their knowledge and understanding of mortgages to help you achieve the best outcome if you decide to go ahead.