In the competitive mortgage landscape of today, if you are paying anything more than three point something per cent on your home loan, you are possibly throwing away your hard-earned money at the banks, which you could have used otherwise.
Yet, many Australian homeowners avoid refinancing their home loans – considering the process to be too much of a hassle for reducing only a few basis points from their interest rate.
But did you know that by spending just a few minutes of your time comparing home loans online, you can find rates starting as low as 3.39 per cent per annum (variable)? And, in case you are wondering, a reduction of one per cent on an average $400,000 home loan for 30 years at 4.50 per cent per annum can save you $230.56 per month or $83,002.50 over the life of the loan (Use this mortgage repayment calculator to work out your savings).
Refinancing is easy
“The process of refinancing our home loan was incredibly easy, thanks to our HashChing verified broker, who made the process stress-free and quick. Today, we are saving over $300 each month, which is great compensation for spending a few hours and completing some paperwork to get the deal through,” says Marc, who recently switched his mortgage lender.
Marc was not actively looking to refinance. He came across HashChing on social media and decided to check the home loan rates on the website out of curiosity. However, when he stumbled upon a deal much better than his own, he decided to go through the process.
Today, Marc is using his savings to pay down his home loan faster as well as save for a second property.
The benefits of refinancing:
Well, a lower interest rate is an obvious benefit of refinancing your home loan. A lower rate makes your repayments easier to manage, and you save money in interest that can be utilised to pay off the principal faster and reduce the loan term.
Here are some of the common reasons to refinance your home loan:
- A lower rate of interest
- Extra features in your home loan
- Debt roll-over
- Equity home loan to fund another property or renovate
Have you checked your home loan lately?
Experts suggest it is good to revisit your home loan every six months or so to see how your rate stacks up against the best deals in the market. And, if you find a better rate, there is no reason why you should continue paying extra.
According to Beth, a mortgage broker, the main thing to consider while refinancing is whether the reduced rate is beneficial despite the cost you may incur in exiting your existing loan.
Yes, 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. There would also be costs associated with setting up a new loan, such as application fees.
Besides, if the value of your loan is more than 80 per cent of the current value of your home, you may be required to pay LMI, which could add to the cost of your home loan.
As a result, Beth urges homeowners to determine their breakeven point before deciding to switch their loan. The breakeven point refers to the time when your savings are no longer applied towards recouping the cost of refinancing 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.
When should you refinance?
“If you have been with the same home loan for a couple of years, you are probably a victim of the set and forget’ attitude that could be costing you dearly,” says Beth. “So, shrug off the laziness and start comparing home loans online to see if you are on the best possible deal in the market,” she adds.
However, she cautions that it is beneficial to refinance only if it’s going to save you money, or, you get the benefit of extra features, such as an offset account or free additional repayments and redraws. With an offset account, you reduce the interest you pay on your home loan, as the money in the account is ‘offset’ against your outstanding loan balance. Thus, a larger portion of your money is applied towards the principal, slashing the years from your loan term.
Indeed, saving money is easy if you land yourself the right home loan deal. If you think your home loan is not suitable for your current circumstances, or find yourself paying more than the market average, it is time to fish for a better home loan deal. Start by comparing home loans online or get in touch with a HashChing verified mortgage broker to find the most relevant deals for your situation.
By Vidhu Bajaj,
HashChing Content Writer