Everyone wants to pay less on their mortgage and refinancing is one way that could help lower your interest rates, but is it worth it? We take a look at how you can get the most out of refinancing.
Generally, people refinance to negotiate a better deal on their home loan and pay it off sooner. Depending on your situation, you should be able to save money by taking advantage of lower rates or new products that were not available when you first negotiated your home loan.
To put this into perspective, let’s say you took out a $300,000 loan at 7.5% over 30 years with monthly repayments of $2,098. If you refinance to a new loan at 4% you could save $239,543 ($665 per month) over the life of the loan by making the minimum repayments of $1,432 per month.
Once you have refinanced, if you continue making the same minimum repayments as your previous loan ($2,098 per month) you will potentially save $346,912 and pay off your mortgage 165 months early.
Make it work for you
Take advantage of your refinance loan by:
- Consolidating debts: Home loan interest rates are often lower than those of other forms of credit, so you can save money by consolidating debts such as credit cards or personal loans into your mortgage. Beware, however, paying off a short-term loan over a longer period will likely incur extra interest and fees over the longer term. Put money saved from consolidating your debts into your mortgage as if you were still repaying the other debts to reduce the overall debt faster.
- ‘Splitting’ your loan: Nominate a portion to be charged at a fixed rate of interest for a set period of time, with the balance charged at a variable interest rate. When the fixed rate period ends, the loan reverts to the variable interest rate. You will benefit from the security of the fixed rate and flexibility of a variable rate loan, and are impacted less if interest rates rise.
- Having an offset account: The balance of your offset account is subtracted from the remaining principal amount before interest is applied, meaning you spend less on interest over the course of your loan.
- Make extra repayments: Any repayments made on top of your regular repayment will save money by reducing the amount of interest you will pay.
When should you consider refinancing?
Life brings change and your mortgage needs to keep up – maybe now you have a partner, a young family, a new job that pays more or have become empty nesters with extra cash on your hands. If the terms of your current loan do not allow you to pay more (or less) on your principal amount, it could be worth considering refinancing into a more flexible arrangement.
Refinancing or loan switching can save money but you might incur costs such as exit and establishment fees, government charges and administrative or legal expenses. These costs need to be weighed against the benefits to determine if you will save in the long run.
Before you make any decisions, be clear on your reasons for refinancing. It is also a good idea to speak to an experienced mortgage broker or financial expert to ensure you are making the right move for your financial situation.
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Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Connect with Louisa on Linkedin.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not consider the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.