Reviewing your home loan regularly could potentially save you thousands of dollars over the life of the loan.
According to the statistics released by the Reserve Bank of Australia (RBA), owner-occupier variable home loan rates fell from 3.50% per annum in November 2019 to 2.59% per annum in November 2021.
Using a loan repayment calculator, you’ll find that if a $350,000 loan with a term of 25 years and an interest rate of 3.50% per annum refinanced at a rate of 2.59% per annum could lead to savings of over $49,000 over the term.
How often should I review my home loan?
As a rule of thumb, if you have been with your lender for over three years, it is time to take stock and check if your home loan is still right for you. There are several reasons to do this. First is the fact that interest rates have fallen considerably in the past few years, and a difference of a few percentage points can lead to significant savings on a home loan.
The mortgage rates in Australia have been at a record low for the past few years. Due to high market competition, lenders are ready to offer even better rates and features to lure customers or keep them from being lured away by competitors. Comparing your home loan interest rate to the market average every few years could therefore help you ensure that you aren’t throwing away your hard-earned money at the banks by paying interest at a higher rate than new borrowers in your situation.
It is also possible that your financial or personal circumstances have changed over the years. For instance, if your credit score was average at the time of taking out the mortgage and it has now improved, there may be better home loan deals available on the horizon for you.
It could also be the case that you recently welcomed a new family member and require money to renovate your home. If you have built some equity, refinancing could help you release some of that equity for remodelling. If you can find a lower rate at the same time, it will help you save in interest payments as well.
With so much competition and choice in the market, you don’t have to adjust to a loan that doesn’t suit you. In fact, it is highly possible to have a loan tailored to your requirements and also lock in a low-interest rate.
Whether you need an offset account linked to your loan, have all your credit streams merged under a single loan, or fix your rate for some time, it’s possible to find a home loan deal with the features you need at a competitive rate.
It’s also possible you find yourself paying for certain features in your home loan that you no longer need. Revisiting your home loan can help you find a tailored home loan deal so that you are only paying for what you need.
Is refinancing always a good idea?
Honestly, it is a good idea to review your loan every few years to see where you stand. Refinancing is a good option if:
- You are getting a better deal or a lower rate.
- You have recently renovated and want to cash in on the equity.
- You plan to remodel your house and require some cash in hand.
- You want to add some additional features to your loan.
- You have decided to consolidate all your debts.
- You are not happy with the service standards of your bank.
However, ask yourself the following questions before you take any decision:
- Does the lower interest rate cover your refinancing cost?
- Are there any other payments, such as exit or entry fees involved?
- What are the long term costs involved?
- Do the beneficial terms only apply to the first few years of repayment?
While refinancing is a great option to save over the life of your loan, you must consider all aspects of a loan and your financial goals before you switch.
If you do your due diligence or have a mortgage broker do the legwork for you, you may find a home loan option with a lower interest rate, lesser fees or better features than what you have currently. However, switching lenders to get a better deal on your home loan is not always necessary. Sometimes it is as simple as picking up the phone to negotiate a lower rate with your lender. Or, you could have your mortgage broker negotiate on your behalf.
In case the negotiation doesn’t work, you have the option of switching lenders, but it’s worth calculating your breakeven point to ascertain your savings. You’ll also find this guide on how to refinance your home loan handy.