ACCC's recent Home Loan Price Enquiry report highlighted that many borrowers with older home loans are wasting their hard-earned money by not switching to the competitive interest rates available on new loans. According to the report, interest rates have dropped significantly over the past few years (as indicated in the graph below), and many borrowers stand to save a lot of money by simply asking their lenders for a better deal!
Top Benefits Of Refinancing Your Home Loan
Depending on the type of loan you're eligible for and your personal circumstance, refinancing can offer one or more of the following benefits:
a) Reduced Repayments
Refinancing to a lower interest rate can lead to immediate savings. For instance, the monthly repayments on a home loan of $400,000 at 4.00 per cent p.a. will be $1,938, and the total cost of the loan over a 25-year term will be $581,614. However, at 2.2 per cent per annum, your monthly repayments will be $1,734, saving you more than $200 per month and $61,224 over the life of the loan.
b) Additional Loan Features
If you're switching home loans, it is worth considering extra features like flexible repayment terms, additional repayments at no cost, a free offset account and fee waivers. Such extras make it easier to manage your repayments, save you money, and help you pay down your debt faster.
c) Debt Consolidation
If you're struggling with multiple debts, it's possible to consolidate your debts into a single loan with a lower interest rate to make your monthly repayments easier to manage.
d) Equity Cash Out
Refinancing your home loan may allow you to cash out some of the equity you've built in your home by paying off a part of your existing loan. You can use this money to undertake a major renovation project or even fund the deposit for your next property. In the present situation, the most immediate benefit of refinancing is that it can help cash-strapped borrowers inject some extra money into their monthly budget to meet their living expenses. If you've received a pay cut, lost your job or expect your living costs to increase, refinancing to a lower rate of interest could be a viable solution to manage mortgage stress in the short run.
What You Need To Know Before Refinancing Your Home Loan
Refinancing has several benefits, but it does come with some pitfalls that you need to be aware of. Here are five things you should know before refinancing your home loan:
1. The Cost of Refinancing Your Home Loan
Just like a regular mortgage, there are various costs associated with refinancing, such as loan application fee, break fee or exit fee (if you're switching from a fixed-rate loan during the fixed term), and Lenders Mortgage Insurance (LMI) premium if you're borrowing more than 80 per cent of the property's value.
If you're planning to refinance to save money, one of the first things you should do is crunch the numbers to see how much you'll save and whether it's worth the costs you're going to incur. If your closing costs are on the higher side, and you think it will take several months to recoup the fees, you might want to reconsider your decision.
For example, if you're paying $3,000 in closing costs and saving $100 per month on your mortgage, it will take you 30 months to reach the breakeven point. While this is a reasonable amount of time, you might not be able to recoup the costs if you plan to refinance again in the future.
2. The Duration Of Your Home Loan
The duration of your loan is an important point to consider. For instance, refinancing to a longer-term will reduce your monthly repayments. However, refinancing to a longer term also means that you'd be paying interest over an extended period, which is likely to increase the total cost of the loan. On the other hand, refinancing to a shorter term will cause your monthly repayments will increase, but you'd be debt-free sooner.
Often, it is a good strategy to refinance for the remaining term of your loan at a lower interest rate but continue with your existing monthly repayments to hit back at your mortgage harder every month without feeling the pinch.
3. Your Loan-to-Value Ratio
Your loan-to-value ratio is an important parameter affecting the interest rate and status of your mortgage application. Generally, lenders will let you borrow up to 80 per cent of the property's value. So, if your LVR is 70 per cent (which means your equity is 30 per cent of the property's value), you're likely to be eligible for a lower rate of interest. Some lenders will also allow you to tap into your equity and increase your mortgage size to 80 per cent of the property value. However, if your LVR is more than 80 per cent, you might be required to pay for Lenders Mortgage Insurance, which is an additional cost that can potentially add thousands to your debt.
4. The Impact On Your Credit Score
Your credit score is a determining factor for every credit application you file. If you find your credit score is low, it's better to wait it out and build your credit before filing your mortgage refinance application. When you apply with a low credit score, you risk rejection and damage your score further. Furthermore, as refinancing is a credit application, it will appear on your credit file. Several applications filed in a short period can adversely impact your credit and the ability to borrow in the future.
5. The Truth About Honeymoon Rates
Refinancing to a home loan with a low introductory or honeymoon rate could save you a lot of money in the benefit period. But have you checked what rate the loan will revert to at the end of the honeymoon period?
A sudden jump in payments at the end of the introductory term can put your finances in disarray. This is also true if you're planning to fix your mortgage rate, as you need to account for future rate hikes to avoid a mortgage shock at a later date.
A Mortgage Broker Can Help!
With interest rates at a historic low, this could be the right time to refinance your Sydney home loan to a more competitive rate and boost your savings. A mortgage broker can help you with competitive home loan deals with additional features that can help you pay down your loan faster. A broker can also help you determine whether refinancing is the right solution for you or not. Often, it is the easiest to pick up the phone and ask your lender for a lower rate before looking elsewhere to refinance. A mortgage broker can negotiate on your behalf, bringing in their years of expertise to increase the likelihood of a positive response.
At Wealthy You, we make it simpler for you to refinance your home loan with flexible and affordable financing options tailored to your personal circumstance. Visit our refinancing page to learn more about our service and pre-qualify your loan, or call us directly at (02) 7900-3288 to have a confidential discussion regarding your home loan. We will do our best to help you make well-informed decisions regarding your mortgage through expert advice tailored to your needs and preferences.