Saving on a home loan can happen in many ways when refinancing
Refinancing can come with many saving opportunities such as lower interest rates, shorter loan terms or money-saving features such as the ability to make fortnightly repayments, unlimited additional repayments and 100% offset accounts.
When comparing refinance loans, it's important to find a mortgage with a competitive rate and useful features that will help you lower your periodic repayments and better manage your loan to suit your needs.
To illustrate, if you had a home loan of $400,000 with 6.30% interest and you refinanced to a lender that offered 5.30% interest- just 1% lower- you would save around $242 each month in interest. This would lead to a staggering $72,675 saving over the life of your mortgage.
To discover how much you could save switching to a cheaper interest rate, use our free home loan comparison calculator.
Read on to learn more about the features you should consider when refinancing.
How much can I save by switching to fortnightly repayments?
Some home loan knowledge can go a long way in helping you save interest and pocket the savings. Industry insiders know that interest on a home loan is calculated daily. As a result, choosing weekly or fortnightly repayment schedule instead of a monthly repayment schedule can save you interest.
If you pay a home loan fortnightly instead of monthly, your remaining loan amount will reduce twice a month. For the second fortnight of the month, interest will be calculated on a lesser loan amount than if repayments were made monthly. Therefore, more frequent home loan repayments equals less interest over the life of the loan.
When you make fortnightly repayments, more repayments are made in total which means it's the equivalent of making additional repayments compared to a monthly repayment plan.
Tahlia opts for a fortnightly repayment plan
After comparing different home loan options, Tahlia and her husband realise that they could net significant savings by refinancing to a lender that allows them to make fortnightly repayments instead of monthly repayments. On her $550,000 home loan at 4.5% interest, their monthly repayments are $2,786 and total amount repayable is $1,003,236 over 30 years.
However, after doing some research and speaking with a mortgage broker, Tahlia and her husband find a lender that not only offers a more competitive rate but also allows them to make fortnightly repayments. From doing some quick calculations, Tahlia realises that if she repays her loan on a fortnightly basis, her repayments will be just $1,393 and total amount repayable would be $926,144.
This amounts to a saving of $77,092 over the life of the loan.
After calculating the costs of refinancing, Tahlia and her husband decide to refinance in order to reap the cost savings from the repayment flexibility and more competitive features offered by the new lender.
Note that for this strategy to work your repayment must be the monthly repayment halved and paid every two weeks.
Want an idea of refinancing rates? Look at our comparison table" limit
How much can I save by making extra repayments?
If you're thinking of refinancing your home loan to a new lender, one feature to consider is the ability to make additional repayments. Making additional repayments towards your mortgage can help you reduce the amount of interest you'll pay over the life of the loan and thereby reduce your loan term.
While it may be difficult to get into a habit of making regular extra repayments and to practice the financial discipline involved with using this feature, it pays to find a mortgage that will allow you to make unlimited additional repayments. However, if interest rates drop, this may be a good time to make extra repayments as you'll have lower monthly repayments.
When comparing different refinance home loans, consider switching to a lender that allows you to make extra repayments as this can lead to significant cost savings.
For instance, if you had a loan of $400,000 at 5.0% interest and you started making extra monthly repayments of $100 after 5 years of having your mortgage, you would save a total of $26,604.55 and you would reduce your loan term by 2 years and 1 month.
How much can I save by using a 100% offset account?
Paying money into a 100% offset account has the same effect as making additional repayments towards your mortgage — except with the useful advantage of being able to withdraw the funds at any time.
Money deposited into a 100% offset account reduces the outstanding loan amount for the purposes of interest calculation. An offset balance of $10,000 on a $400,000 home loan means that interest is only calculated on $390,000 ($400,000-$10,000). Keeping $10,000 in an offset account could save $16,000 over the life of the loan; and even more so if regular contributions are made to the offset account.
As offset accounts are linked to a home loan, borrowers will usually receive their salary in that account, which will help reduce interest on their mortgage from the day they are credited their pay. It is a great 'set and forget' feature to work away at reducing the amount of interest you pay over the life of the loan.
When should you consider refinancing?
If considered carefully, there are many times when refinancing can make financial sense.
Although you may feel content with your current home loan, you may want to switch to a new lender to take advantage of a lower rate or more suitable features.
Here are some ways that refinancing can be useful:
- To save money. An opportunity to save money is a great reason to refinance. This can be done by refinancing to a cheaper interest rate or by refinancing to a home loan that has features that enable you to save interest, such as 100% offset accounts and unlimited additional repayments.
- Debt consolidation. You may also consider refinancing if you've incurred lots of consumer debt that eats heavily into the household budget. One of the more common reasons for refinancing a home loan includes consolidating car loans, personal loans and credit card debts. The interest rates on the mortgage are substantially cheaper than interest rates charged on other short-term debt. Therefore, you can save on interest if you refinance for debt consolidation. However, keep in mind that if you refinance for this reason you should make an effort to make additional repayments so that you're not paying short-term debt over an extended loan term.
- Renovation. Another reason for refinancing your home is to raise cash to complete home renovations. Larger renovations, such as refitting kitchens or bathrooms or adding new rooms to the home, are often expensive. Refinancing the mortgage to cover the cost of these things can help you access funds to complete your renovation project.
- Property investment. There are also people who choose to refinance for property investment. Those people raise a deposit from the equity in their own home to put towards purchasing an investment property.