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Let's say you borrow $400,000 (that's close to the Australian average mortgage) with a variable rate of 4.00% p.a. and a 30-year loan term. Your repayments would be around $1,909 a month. But if you changed home loans to a more competitive rate of 3.09% p.a, your monthly repayments would drop down to around $1,705. That’s a saving of $204 per month. Over the course of 30 years, you’d save $73,357, or $2,445 a year.
What is refinancing?
Refinancing simply means switching from one home loan to another. You can switch loans with your current lender or get a new product with a new lender. The main purpose of refinancing is usually to get a lower interest rate to save on repayments. But you can also switch to a mortgage with more features, or move from an investment loan to an owner-occupier loan. Some borrowers refinance to unlock equity in their property.
Why should I refinance?
Switching can save you money, but there are far more benefits than simple savings. You should look switching mortgages to:
Get a lower interest rate. The lower your rate, the lower your repayments. And rates in Australia are very competitive right now. If you haven't looked at your home loan in a few years you might be surprised to learn how much you're paying. Compare rates in the table above and see just how much you could be saving.
Unlock equity. If you've been paying off your loan for a while this money is called equity. And you can access it through a line of credit home loan in order to purchase another property, renovate your home or buy a car. Refinancing in this way can save you money on other purchases (a mortgage typically has a lower rate than a car loan, for example) but adding to your home loan means you're paying it off longer.
Consolidate your debts. Juggling a few debts can be hard. Debt consolidation lets you roll your existing debts into a single manageable loan. If done correctly, you can save on fees and reduce the amount of interest payable by combining your debt into a single repayment with a competitive rate. It's important to work closely with your lender during this period to ensure that you actually save money in the process.
Take advantage of a special offer. Many home loans will offer cash incentives or sign-up bonuses all year round to borrowers who switch. These offers are especially prevalent during the spring "mortgage season". Cashback incentives are usually around the $1,000 mark, but can be as high as $2,000. These offers can be a great way to minimise the costs of changing loans, but be sure that the loan you’re applying for still has a competitive rate, fees and features so that once the cash is gone you’re not left with an uncompetitive loan.
Examples: the benefits of switching to a better loan
Bryan is four years into a 30-year mortgage. It's an owner-occupier, principal and interest loan that started out with a low 3-year fixed rate. But the fixed rate period has finished and the current rate is much higher, at 4.34%. Bryan initially borrowed $700,000 and has repaid $120,000 so far.
Current monthly repayment: $3,104 per month.
Bryan jumps onto finder.com.au and starts comparing loans. He doesn't care about premium features like offset accounts, but wants a loan that is flexible and offers a low rate. Bryan finds a good, basic mortgage product with a variable rate of 3.62%. The loan does come with a $500 application fee. His old loan has a $200 discharge fee.
Switching costs: $700.
New monthly repayment: $2,871 per month.
Even with the cost of switching factored in Bryan is still coming out ahead. By changing home loans he'll save $233 a month in repayments. That's $2,796 a year.
Leah wants more features
After making six years of repayments on a $800,000 mortgage Leah decides she wants more out of her loan. She has a package loan with her bank and has bundled together her mortgage with a credit card and a savings account. But the rate is high (4.12%) and the package doesn't suit her needs anymore. She hardly uses the credit card.
Leah compares her options and finds a variable loan with a 3.75% interest rate and a 100% offset account. She wants to take some of her savings and offset them against her loan to lower her interest and pay off the loan faster.
Savings: Leah's new rate is saving her over $100 a month.
Offset benefits: By putting $30,000 of savings into her offset account Leah can shave a year off her home loan.
Arabella taps into her home equity
Arabella wants to invest in property. She has almost paid off her home and has $750,000 in equity. Because she doesn't have much debt to repay on her loan she can easily switch to a line of credit loan. She can then access cash to use as a deposit on a small investment property. This can be a risky investment strategy if she borrows too much money.
But because Arabella doesn't have much debt and her income is steady her risks are much lower. She's also planning to use her investment property as a source of income, further minimising her risks.
Benefits: Arabella can purchase an investment property faster and generate rental income.
How do I go about switching home loans?
The whole switching process can be a little complicated but think about the savings! Investing a few hours of your time could save you tens of thousands of dollars over the life of your loan. Here's the step-by-step refinancing process:
Examine your current loan. Check your rate, repayment costs and fees. If your rate's above 4% you should look at switching.
Speak to your current lender and ask for a lower rate. Sometimes your lender will offer you a discount on your rate. That could be all you need to do, but you could still find better elsewhere.
Get a quote for your exit costs. If you decide to switch lenders you might have to pay a fee, but it could be worth it if the savings are big enough.
Compare home loan options. Look for a loan with a better rate and features you need. It's that simple.
Crunch the numbers. Examine the costs of your new loan, including application and ongoing fees and make sure the new loan really is a better deal.
Apply for the new home loan. Wait for approval from the new lender.
Exit your current loan. Notify your current lender and discharge your mortgage. Your new and current lender will take care of the rest.
You've refinanced. Be sure to monitor your new loan's repayments and change loans again in a few years if you find a better option.
Generally you’ll need to provide proof of your salary and other income, government payments, home loan statements and a copy of your council rates notice, statements for any liabilities and either your drivers licence or passport. Once your information has been reviewed, your lender can normally give you a response fairly quickly. The verification, valuation and assessments, approval and settlement can take up to a month or more to complete depending on your financial situation.
How much will switching cost me?
Changing mortgages can come with upfront costs for starting a new loan and exiting your old loan. Fees are usually the biggest expense. You should always factor these costs into your decision, but don't let a single upfront cost deter you from making a major saving in the long-term.
Fees related to switching loans include:
Early terminations fees (for your old loan)
Discharge fees (for your old loan)
Application fees (for your new loan)
Ongoing fees (for your new loan)
Are there situations when I shouldn't switch?
For most borrowers refinancing is a good idea. But it's possible that switching loans just isn't worth it. Here are a few cases where you're probably better off sticking with your current loan:
You have a fixed rate home loan with a very high exit cost and the cost of fees could outweigh the benefits of changing until the fixed rate period is over.
You think you’ll probably sell your property in the near future and you won't keep the loan long enough to make any decent savings.
Your loan amount is small. In this case the savings you’ll get by switching might not be worth the interest you’ll pay.
You've been with a lender for quite some time, enjoy the service you receive and have other products with them (you might be better off asking your lender for a discount).
Your property value has fallen or your LVR is still over 80%. This could see you pay lenders mortgage insurance again.
You need to refinance to a longer term. This could result in more interest paid over time.
Some lenders will accept bad credit borrowers, but might charge higher interest rates and fees. It’s a good idea to get a copy of your credit file before making any applications. Also note that a credit repair company can in some cases help to remove some negative listings on your file.
Equity refers to the amount of your property that you own outright. As you pay your loan down and your property increases in value this amount increases. Refinancing at its core is leaving your new home loan and applying for a new one, meaning that regular equity requirements will still apply. This means you'll need a minimum of 20% equity in your home, but in some cases this will be as little as 5%.
Based on current economic conditions and interest rates, a loan of $76,000 or less may not be worth refinancing. However, this figure is a ballpark figure and does not take into consideration your personal circumstances.
This decision is ultimately up to you, but here are some considerations: A fixed interest rate means that your rate won't change for a set term, so it's a useful tool if you think interest rates are going to rise, to keep your repayments low. A variable rate will mean that your rate will fluctuate according to the official cash rate, so this is useful if you think rates are going to be cut. If your lender passes on the cut your repayments will lower.
Generally the lender will still require a valuation, as your bank will need to have an up-to-date idea on the property value. When negotiating, it may be possible to have this fee waived.
In most cases topping up your loan is easier and cheaper. You'll need to approach your existing lender and they will reassess your situation. Switching will require that you go through the whole home loan application process again, and can be more expensive as there are more fees involved.
If your account has already been settled there shouldn’t be any reason why your bank wouldn’t cooperate with the lender you’re changing over to. If this is occurring you can submit an official complaint to your lender and if you're unhappy with the resolution, you can contact the office of fair trading for your state, and inform them of the situation.
Richard Whitten is Finder's home loans writer. He helps Australians understand the ins and outs of mortgages so they can find lower rates and make smarter property decisions. Richard trained as a high school English teacher at the University of Sydney, but found that mortgage management was more rewarding than classroom management. Before working at Finder he lived in Seoul, where he edited textbooks and ran communication courses for Korean corporations.
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