Refinancing your home loan can lead to significant savings if done correctly and at the right time.
Many Australians refinance their home loan to minimise their repayments, to access equity they've built up in another property or to benefit from more suitable features or better customer service provided by a new lender.
While refinancing your mortgage can help to lower your periodic repayments, it's important to consider the costs of refinancing before making a decision.
Read on to learn more about how much you can save from refinancing and the costs involved with this type of transaction.
What is refinancing?
Refinancing is the process you go through when you review your current home loan to make sure it's still suitable. This can by negotiating your rate with your current lender, however refinancing is often done by exiting your current loan and applying for a new home loan with a new lender.
Generally, the refinance is justified where the new lender offers a more competitive interest rate, lower fees or has features that better suit your needs. The refinance only makes financial sense if the benefits of switching outweigh the costs.
How much can you save?
If done correctly, refinancing can save you thousands over the lifetime of your loan.
The below case study demonstrates how much you could potentially save by finding a rate that is just 0.5% lower.
Charmaine and her husband bought her first home in VIC and took out a $300,000 home loan with an interest rate of 6.0%. Her principal and interest monthly repayments were $1,932.90.
After doing some research, Charmaine notices a lender that offers a rate of 5.5% and fewer ongoing fees. She compares this rate with several other products on the market and starts the refinancing process.Charmaine bought her first home in VIC and took out a $300,000 home loan with an interest rate of 6.0%. Her principal and interest monthly repayments were $1,932.90.
She decides to speak to a mortgage broker to discuss her refinancing options. After doing some quick calculations, Charmaine discovers that if you switched her home loan to the new lender her monthly repayment would be just $1,842.26 which would lead to a saving of $70 per month or $28,000 over the life of a 25-year home loan.
After doing some quick calculations, Charmaine discovers that if you switched her home loan to the new lender her monthly repayment would be just $1,842.26 which would lead to a saving of around $90 per month or approximately $27,000 over the life of a 25-year home loan.
Use the calculator below to experiment with different interest rates to see how they'll affect your repayments.
What else affects the amount I can save from refinancing?
In reality, there are other factors which may influence the amount you save when refinancing (apart from the interest rate), such as:
Home loan features
The type of loan features that are available with a mortgage can determine the amount you save by switching lenders. For instance, if we use the case study above and assume that Charmaine's original loan was a basic loan with basic features and her new loan came with a 100% offset account or the ability to make unlimited additional repayments, Charmaine could potentially save even more.
This is because she would be able to offset the amount of interest payable on the loan by leveraging the offset account and she would be able to repay the loan sooner by making extra repayments at no cost.
To illustrate, if Charmaine moves $8,000 of savings into her offset account as soon as she opens her new loan, she'll save almost $22,000 over the life of the loan and would reduce her loan term by one year.
The costs of refinancing
Refinancing can be an expensive process so before you switch, make sure you estimate the costs involved. Contact your existing lender to see how much it will cost to exit your loan as you may need to cover:
- Discharge fees
- Registration of mortgage fees
- Break costs if you have a fixed rate loan
You'll also need to pay application fees for opening a new home loan with your new lender, which can include:
- Establishment fees
- Legal fees
- Valuation fees
- Stamp duty for your mortgage
- Lenders mortgage insurance (LMI) if your loan-to-value ratio (LVR) is high (although you may be able to a partial refund if you've already paid this for your first loan).
Compare the fees you'll pay with the potential savings of refinancing. A good rule of thumb is that if the fees are so high that it takes longer than two years for the savings to start coming through, then it may not be a good time to refinance.
The home loan market is a competitive place, so in many cases if you tell your existing lender you're thinking of refinancing they may offer you a discounted rate or other incentives to stay.