Do you know the interest rate you are paying on your home loan? If you haven’t reviewed your home loan in the past couple of years, you could be losing a lot of money while your peers beef up their savings by refinancing to one of the lower interest rate deals available in the market.
There are many reasons to refinance your mortgage. Some of the common reasons include:
- Save more money with a lower rate
- Get access to extra features in your home loan
- Manage debts by rolling them over in your mortgage
- Use the equity in the property to fund another property or renovate
Whatever your reason for refinancing, if you think it is time for you to switch your mortgage, you’d be glad to know that refinancing is a quick and easy process. In case you are wondering how to refinance your home loan, here’s an easy guide for you.
5-Step guide on how to refinance your home loan
- Revisit your home loan – In order to refinance your mortgage, it is important to review it first. Check the interest rate – Is it higher than the market average? Are you paying extra for any features you do not need? Or, are you missing out on additional features that could save you a lot of money?If the answer to any of the above questions is yes, it could be fruitful for you to refinance your home loan to one in line with your current requirements.
- Compare home loans online – The easiest way to start shopping for home loan deals is by comparing them online.When comparing home loans, you must look at three aspects – interest rate, fees and features. It is a good idea to look at the comparison rate of each loan to get an idea of its true cost. Besides, you must also consider the extras you need in your home loan; features such as an offset account or the ability to make additional repayments and redraws at no cost could save you more money as compared to a vanilla mortgage over the years.
You can compare broker negotiated home loan rates on HashChing, that could be as much as one percent lower than lender advertised rates featured on other comparison sites.
- Find out the cost of refinancing – Several fees and costs come up when you refinance your mortgage. Even though exit fees are no longer applicable, your lender might charge you break fees for getting out of a fixed rate home loan. Besides, there would be costs associated with setting up a new loan such as application fees.You might also be required to pay LMI if the value of your loan is more than 80 percent of the current value of your home. If you have already paid LMI on your home loan, your existing lender may refund a part of the premium if you refinance in the first couple of years.
- Determine your breakeven point and savings – Once you have calculated the costs of switching your home loan, you can do a simple calculation to determine your breakeven point. The breakeven point refers to the time when your savings are no longer applied towards recouping the cost of the switch but make their way to your pocket.To calculate your breakeven point, divide the total cost of refinancing by your monthly savings to get the number of months required to make good the loss. Let’s understand this with an example:
Consider Zoey who has a 30-year mortgage that she decides to refinance in the third year of the term. By comparing home loan deals online, she chooses a mortgage that saves her $150 per month (Calculate your monthly repayments here). She also calculates that it would cost her $2,500 to refinance.
As per the abovementioned formula, it would take Zoey about 17 months to recoup the cost of the loan. After 17 months, she would be saving $150 each month. However, there are other factors to consider, too, such as the term of the new loan.
In the above example, even though Zoey saves $150 each month, she could end up paying more over the life of the loan. Why? Because she rewound her home loan to a 30-year term when she only had 27 years remaining to repay the mortgage. This means, she would effectively be paying interest for three extra years!
When you are trying to pay off your mortgage faster, a shorter term would help you meet your goal effectively. By switching to a lower rate and a shorter term, your repayment amount might increase slightly, but you would save more money in interest by reducing the years from the term.
In short, it is crucial to crunch the number before choosing a refinancing deal. You could always consult a broker who can help you with the numbers apart from offering you lowest possible deals from various lenders as well as taking care of your paperwork.
- Use a mortgage broker – While you can directly apply to a lender for a home loan, by choosing to work with a mortgage broker, you can save a lot of time, money and hassle. A broker would analyse your situation in-depth, helping you decide whether refinancing is the right option for you or not. If yes, your broker will identify suitable deals and assist you to complete the refinance including all the paperwork on your behalf, ensuring you have more time for things that matter to you.
HashChing, a borrower-friendly mortgage marketplace, networks with some of the best mortgage brokers with access to discounted home loan deals from over 80 lenders across Australia. You can get in touch with our experts, for free, here! Don’t worry; you will not receive any unwanted calls or emails.
By Vidhu Bajaj,
HashChing Content Writer