Have you checked how your mortgage interest rate stacks up against the current market average of 3.70 per cent per annum?
According to Steven, a HashChing mortgage broker, “It is good to do a health check on your mortgage from time to time.”
In fact, most experts would agree with Steven that homeowners must revisit their home loan from time to time to ensure they are on the best possible deal or not. And, if you find yourself paying more than what you think you should be, it could be worthwhile to refinance your home loan and stop throwing away your precious money at the banks.
But, is it always beneficial to refinance your home loan?
According to some, refinancing only makes sense if your interest rate is lowered by a minimum of half a per cent. Yes, there’s good logic in that statement, however, at HashChing, we think that numbers should back every decision to refinance. Steven explains that there would always be a small fee to pay to refinance the loan, such as government mortgage transfer fee, loan application fee and valuation fee. So, you need to ensure that the benefit of transferring your mortgage is more than the cost of getting a new loan.
Why do you want to refinance your home loan?
A lower rate of interest and more savings, of course!
Well, there’s more…
In addition to a lower interest rate, there are several other reasons to refinance your home loan. It is possible that your home loan no longer suits your requirements; for example, you might no longer want to pay for certain features in your home loan. Or, you probably want to switch to a fixed-rate mortgage or consolidate your existing debts under an umbrella loan. Therefore, the pros and cons of refinancing must be weighed according to your particular situation and what you want to achieve out of refinancing.
Of course, a lower monthly mortgage repayment remains the most popular reason to refinance. And, if that’s what you are looking at – we recommend that you calculate your breakeven point by adding up the cost of your loan and dividing it by your savings. This would help you figure out how long it would be before the smaller repayments start building up your savings effectively. (Use this home loan repayment calculator to know your mortgage repayments.)
For example, consider that you have a 30-year mortgage and decide to switch to a new deal three years into the mortgage. On calculating, you find that switching to the new deal will save you $150 on your monthly repayments. The cost of refinancing the loan is $2,500. By dividing the total cost with your monthly savings, you can see that it would take you about 17 months to recoup the cost of your loan. Therefore, it is only after 17 months that you would start making any real savings!
To calculate the cost of your loan, you must consider the various fees charged by the bank to set up the loan, the discharge fee you would pay to your existing bank, any clawback fee (if applicable), legal fees, insurance, and taxes as well. Every lender will give you an estimate detailing the costs of a loan that you can use to crunch the numbers. We recommend that you compare home loan deals from more than one lender to get the best possible deal for your situation.
You must also remember that when you refinance, you are effectively turning back the clock on your home loan. In the above example, even though your monthly repayment amount gets reduced by $150 for the next 30 years, you might end up paying much more interest over the additional three years. Therefore, it is essential to calculate the term of your loan before you refinance.
Steve suggests that in addition to contemplating the breakeven point and other costs, you must also consider whether refinancing can help you meet your financial goals.
Do you want to refinance to tap into your equity or shorten the term of your loan? Or, do you want to refinance to get rid of the LMI premium? Or, are you looking to consolidate all your personal debts under your home loan?
These considerations are worthy of your attention before you decide to switch lenders. If you are feeling confused, you could always speak to a mortgage broker to empower your home loan journey.
Did you know that a $300,000 home loan with a term of 30 years and an interest rate of 4.15% p.a. refinanced at a rate of 3.50% p.a. can save you over $100 per month and approximately $40,000 over the entire term?
Compare home loan deals online to save more money on your mortgage, now!
By Vidhu Bajaj,
HashChing Content Writer