The easy-to-follow guide to refinancing (to save on your home loan)
Your monthly mortgage payment is probably the biggest expense item in your monthly household budget, so how can you save more on your home loan? Refinancing offers you the possibility of saving on your mortgage, both in the short term and over the long run. However, you’ll want to explore different financing options and ensure you’ve got the right one for you.
If you’re thinking about refinancing to save more, start by understanding the reasons you might want to refinance and review other options and benefits, including refinancing to fund a renovation or consolidate your debts. Timing is also a big thing to keep in mind. If you play your cards right, you could make some serious savings and end up with a loan that has the features you want.
Mortgage refinancing is often seen as being just a bit too complicated for homeowners. The truth is, it is a fairly involved process, but it could be well worth the effort as you could end up saving money in interest and find features you didn’t even know you were looking for.
Reasons to refinance
The big reasons to refinance your home loan are savings, new features, and funding your dreams.
Savings- One of the top reasons to think about refinancing is savings. For example, switching to a loan that lets you make fortnightly payments rather than monthly payments could help you pay down your debt faster.
Easier than you might believe – Another reason to consider switching is the fact that making the change could be much easier than you think. Doing some research, comparing products, and getting expert advice isn’t as complicated as it sounds. With the savings you could gain, the process could be well worth the effort.
New features – Refinancing could be the best way to take advantage of new, fresh features that could help you save more in the long run. New rates, bonus features like offset accounts, and the option to make extra repayments without penalty fees are some of the things a new mortgage could give you. Choosing the right mortgage product for you means taking control of your finances and getting smart with your money.
Debt consolidation – If you have mounting credit card or other personal debts, refinancing could help you consolidate these loans into one manageable product. Since it’s secured by your home, you might pay less interest, which means more savings and quicker repayment of your debt – win. You could focus on the one low-interest loan instead of dealing with the stress of managing multiple debts. However, consider this a short term solution as the principal still needs to be paid.
Renovating: how it could add value to your property
Renovating your property is a strategy well worth considering. To fund a reno, the two most common options are: refinancing to dip into your home’s equity or applying for a construction loan.
With the refinancing option, you’re given a line of credit based on the value of your home and on the amount of your mortgage you’ve repaid. This is calculated using a ratio called the loan-to-value ratio (LVR) – the ratio of your home loan to the market value of your home. To look at this in more detail, click here.
A construction loan is a viable alternative, however there are some hoops to jump through. You’ll need to have council-approved building plans and regular valuations, whilst the lender is also involved as you renovate, monitoring the progress of each stage before they release more money.
By now you should be more aware of the potential benefits refinancing your home loan could bring. If you’re still not sure though, that could be due to some of the rather persistent refinancing myths out there. If you take a closer look, you’ll probably realise these are just myths and they shouldn’t hold you back from refinancing your home or reaping the potential benefits.
Too complex – One common myth about refinancing is that it’s just too complicated. While it can involve some research and evaluating different products, it’s well worth it if you’re going to be able to access money-saving features in a new home loan product. Correcting your course sooner rather than later can mean big savings further down the line. Plus, if you work with a mortgage broker, you’ll have an expert who can help you understand the products and even help with preparing your loan application.
It’s not right for you – As with any other good or service you use, you can choose another product if you find you’re not happy with your current one. The set-and-forget option could be a costly one if you end up paying more on interest or get penalised for extra or early repayments.
You don’t save much – Another common myth is you can’t save a lot of money with just a 0.5% difference in interest rates. In fact, just a 0.5% lower interest rate could mean thousands of dollars over the long term. On a 30-year, $500,000 principal and interest mortgage, you could save around $55,000 if, for instance, you switch to a 5% p.a. interest rate from 5.5% p.a.
Fixed rate mortgages can’t be refinanced – We think this myth might come from the term “fixed” rate – but a fixed rate doesn’t mean your mortgage is set in stone! However there’s normally fees to pay if you break the mortgage within a certain time frame – typically one to five years. However, that doesn’t mean that you can’t gain from mortgage refinancing. Consult a mortgage expert to weigh the costs against the benefits before you make the decision to change.
1Warning: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
Is it the right time to refinance?
Timing can be everything when it comes to saving the big bucks with a home loan refinance. Refinancing at the wrong time could raise your costs, while making the move at the right time could mean you get the savings you’re looking for. Things to keep thinking about include your credit rating, the economic climate, and low rates.
When should you refinance your home loan?
Credit rating – If you currently have a good credit rating, think about refinancing as your credit report could support your chances of securing the home loan product you’re looking for. On the other hand, if you have a bad debt history, it might be in your best interests to wait until you’ve paid down your debts before refinancing.
Economic climate – A strong economical climate can mean good things for homeowners looking to refinance, as interest rates tend to be lower during these times. Like with anything, there are pros and cons, refinancing when rates are low lets you save money on the interest part of your mortgage, but don’t forget to take exit fees into account. If the exit fees are outweighed by the savings you’ll gain, then it’s a great time to refinance.
The business cycle – Keep track of the Australian business cycle – which has a strong impact on interest rates – as you look for a good time to refinance. The Australian business cycle typically lasts around two to five years, so you could time your refinancing when the economy is strong and interest rates are in a low period.
Expiration dates – Keep across the expiration dates on your current home loan. For example, if your home loan has a lock-in period that’s due to expire soon, it could be a good time to think about refinancing as you won’t need to pay the break costs.
The right timing can help you maximise your savings on a home loan refinance, so check out this article on knowing when to refinance for more information about getting the timing right.
Refinancing can be involved but it doesn’t have to be complicated. There are really 4 key steps to getting your loan refinanced:
Home loan comparison
Always compare the home loans rates out there and check with your mortgage broker about interest rates, fees, and features. Ask your mortgage broker to help you with a quote of how much it will might cost to switch from your current home loan to a new one. Use a loan calculator, and check out current interest rates.
Think about the loan term: will you still be making repayments in retirement if you refinance? How much more in interest do you end up paying if you refinance with a longer term mortgage?
Once you have these numbers you’re ready to do more research. Don’t forget, if your current or new loan is or will be 80% or more of the value of your home, you should budget for having to pay lender’s mortgage insurance.
Check where you’re at
Figure out where you’re at now by getting your mortgage balance, interest rate, and how much time and money is left to repay. Review your mortgage documents and find out about exit fees, discharge fees, and any other additional costs – your broker can help with this. Get a copy of your credit file. Knowing your current situation will help you make a smart decision when you’re shopping around.
Think about the type of loan you want, including features, fixed or variable, and options like linked offset accounts. When you find a home loan product that looks right for you, ask the lender for a key facts sheet. The key facts sheet will tell you all about the essential aspects of the loan in a standard format to make it easy for you to compare different mortgage products.
Once you’ve found the right home loan for you, it’s time to start getting the paperwork together and start the application process. Working with a broker could help you find a great product and negotiate the terms and features you’re after. To get started, click here.
Despite the common myths about complexity and cost, mortgage refinancing could save you thousands of dollars, whether you’re switching to a loan with a lower interest rate or consolidating multiple debts into your mortgage. Switching to a home loan that works better for you could also help you save by accessing additional features like offset accounts and the ability to make extra repayments without penalty fees. You could even finance a renovation with a home loan refinance and raise the market value of your house. The key to a refinancing that works for your financial goals is ensuring it’s a good time to refinance and planning it properly. Doing your research and getting the right advice, ideally from a mortgage broker, are also essential.