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According to new research, 40 percent of home loan customers are not aware of the interest rate on their home loan! Call it laziness, carelessness or over-confidence – but there is no denying that ignorance is costing mortgage holders big money. Yes, many homeowners are paying thousands of dollars extra because they do not know their interest rate.

 
Not reviewing your home loan could cost you serious money
 

According to experts, mortgage holders must review their home loan every two years to ensure they are not paying too much. To put this in perspective, if you rewind to January 2015, the average variable home loan lending rate at that time was 5.10 percent. In January 2016, home buyers could score an average rate of 4.85 percent on their mortgage while in January 2017, it was possible to get an average rate of 4.50 percent on a home loan. Currently, you can find home loans starting as low as 3.56 percent, which can help your wallet beef up considerably.

So, Linda who borrowed $300,000 for 30 years in 2015 at a rate of 5.10 percent currently makes a repayment of $1,628.85 monthly. If she refinances to a rate of 3.56 percent, her monthly repayments would reduce by an amount of $271.65. In total, she would save $97,793.07 over the life of the loan.


Get mortgage savvy

The interest rate is the first thing you see when you take out a home loan. Of course, you did your research and picked out the best deal possible when you purchased your home. But that was then. Over the years, the mortgage industry has turned quite competitive and many smaller banks and non-bank lenders have entered the fray, offering competitive deals and rates under 4 percent.

Many existing homeowners continue to feel smug about the rates they scored a few years back without exploring what terms their banks are offering to new home buyers. If you haven’t reviewed your home loan for some time, it could be a good start to contact your bank and verify what they are offering to new mortgage hunters. Once you know, you could always ask your lender to switch you to a better rate or risk losing a financially disciplined customer to competition.


Refinancing your home loan

Most people would tell you refinancing only makes sense if your interest rate is lowered by at least half a percentage point. However, we insist you crunch the numbers to determine your breakeven point before switching home loans. To determine when you’d actually start saving – begin by calculating the costs of refinancing. This includes the discharge fees you’d be paying your existing bank, the cost of setting up the new loan, legal fees, insurance and taxes. In general, your lender will give you a fair estimate, detailing the cost of the new loan. To get the best possible deal, start by comparing home loan rates from various lenders online.

Now, to determine when you’d effectively start benefitting from the switch, divide the costs with your savings to figure out your breakeven point.

In the above example, Linda was already two and a half years into her home loan when she decided to switch to a lower rate, her monthly savings being $271.65. Linda’s total refinancing costs came to $2,700. This means, it would take Linda around 10 months to recoup her costs and start using her savings to pay off her mortgage quickly or meet other life goals. However, it could be a different scenario for different people. Homeowners must remember they rewind the clock on their home loan by refinancing, which could mean more interest, despite lower repayments, thanks to the extended term.

Indeed, switching to a lower rate could save you thousands of dollars but the real benefit of the switch cannot be weighed in straight numbers – various factors will affect the judiciousness of your decision, including the costs, the term, the reason why you want to refinance as well as the lender you choose to refinance with. We suggest you speak to an expert who can suggest the right home loan product for your situation. At HashChing, we have experienced brokers who do all the leg work on your behalf, at no cost to you, making it a breeze to finance or refinance your home. Get in touch to know more.

 

By Vidhu Bajaj,
HashChing Content Writer

 

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