Another day, another news update: ‘Mortgage interest rates are at an all time national low’. You keep hearing the word refinance bouncing around and recall that your friend mentioned you should consider it, but the question still lies… ‘Should I refinance my home loan?’
The short answer? Yes! But only if it can secure you a better deal or get you to your ideal financial situation. Stuck on wrapping your head around refinancing? Check out our FAQs or our introductory refinancing guide.
Otherwise, read on below to find out:
- Why keeping tabs on your home loan rate is important
- Why even a small difference in interest rate can save you thousands
- How to find out your current home loan rate
- Ways to change your loan to suit your lifestyle and goals
- The best times to look for a better deal
- What you need to do to get a better deal
Do you know your home loan rate?
When was the last time you thought about your home-loan rate? If you can’t remember, we wouldn’t be surprised. In fact, not many Australians want to give thought to how much interest they’re paying.
Usually we make the repayments and get on with it, but knowing the amount of interest you’re paying could actually be very handy. Why? Because making sure you always have the better deal could save you hundreds of dollars a month and thousands over the life of your loan.
Lenders are often competitive in their rates. As so, if you’re keeping up to date on who’s offering what, you could refinance to a lower interest rate that saves you money. A little difference in the interest rate decreases the amount of overall interest you pay over the lifetime of your loan.
But how much of a difference can the interest rate make?
Quite a lot actually! Compare scenario one to scenario two below:
|Scenario 1||Scenario 2|
|Jeff buys a house for $1,000,000 and aims to pay the loan over 30 years at a 3.14% interest rate on a principal + interest repayment plan. |
This means he pays $4,292 per month.
The amount of interest he pays over the life of his loan? $751,386.
|John buys a house for $1,000,000. He also aims to pay the house over a 30 year period, however this time at a 2.97% interest rate on a principal + interest repayment plan. |
He pays $4,104 per month.
The amount of interest he pays over the life of his loan? $477,307.
A 0.17% difference in interest might not seem like a lot, especially when you take into consideration that you only reduce your repayment amounts by $188, however as seen in the example, it all adds up.
How do I find out my current home-loan rate?
Most lenders usually have a page listing the current interest rates for various home loan products. If you can find your home loan product on the list, you’ll be able to find your interest rate too! Moreover, you can also call your lender to find out your interest rate. Other ways include checking your most recent mortgage statement, or if your bank offers it, your online or mobile bank accounts.
Where do I start on actually finding and getting a better rate?
Once you’ve found out your current interest rate, and the type of rate your home loan product is offering (that is a fixed, variable or split loan product), a quick comparison online between other interest rate offers could help narrow down which lenders you would like to refinance with. Another option would be to call your current lender and ask for a better deal, or to talk to us if you’d like some help.
How can I use this better deal to my advantage?
The interest rate that appeals to you most and the ways you can use this to improve your financial situation will vary depending on your personal circumstances. In addition to this is the specific way you shape your loan to suit your needs. For instance you could have:
|Interest Rate||Loan Term||Repayment Size||Outcome|
Lower interest rates
|Same loan term||Reduced repayments||Free up cash flow|
|Shorter loan term||Same/Slight increase in repayment size||Loan paid off sooner|
|Extended loan term||Reduced repayment size||Loan paid off later|
Depending on your goals, either option may be most beneficial to you. However, if you aren’t sure which arrangement would suit your needs or would like some help figuring out which is best to get you in the financial position you’d like to be in, talk to us now.
When should I consider looking for a better deal?
The general rule of thumb when it comes to refinancing is that you should aim to refinance once you’ve gained at least 20% equity in your home. This is to reduce the chance that you may have to pay for Lenders Mortgage Insurance (LMI).
Given that the time it takes one to gain this much equity is dependent on numerous factors, another way to decide whether or not it may be time to refinance is when the introductory rate offer of your loan has expired. Since lenders often offer new customers a lower rate, it might be beneficial to check whether your rate is still competitive or if there are other options out there for you.
The process of refinancing for a better deal:
If you’re looking to refinance for a better deal, or still need help deciding whether or not refinancing is a good decision, completing the following steps may make your decision easier:
- Find out your current home loan rate and type (You can find this on your latest home loan statement or call your lender and ask them to confirm it for you).
- Compare these to other rates offered by lenders in the market.
- Ask your current lender whether they’d be willing to offer you a better deal.
- Calculate the fees you’ll need to pay (This can include break fees, valuation costs or discharge and establishment fees).
- Calculate the break even point (This is the point where costs and savings meet. If you are going to potentially incur more costs than you would savings by refinancing, it is probably best to reconsider).
- Run you options by a qualified financial service provider or mortgage broker.
Is there anything else I need to know?
When it comes to taking out any loan, it’s always important to remember that you will initially be paying off more interest than principal. While you may be more eligible to refinance when you’re almost at the end of your loan term, you could end up prolonging the time it takes you to own your home. Furthermore, certain lenders only allow you to refinance for a set loan length, rather than continuing off of your previous loan term length.
Is now a good time to refinance?
If you’re in the financial position to refinance now is as good a time than ever. With introductory interest rates at an all time low of under 2% and the average home loan rate currently between 2-3%**, refinancing now could save you thousands of dollars over the lifetime of your loan.
Aren’t sure where to go from here or still can’t determine whether or not refinancing is for you? Speak to us now!
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.