How much could you save by refinancing? Let’s crunch the numbers
There's a simple way to work out how much you'll save with a lower home loan rate.
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If you've had a home loan for a few years, you might have stopped paying attention to your mortgage's interest rate. It's understandable, but it could be a costly mistake.
Home loan rates are quite competitive right now. Looking at loans from other lenders elsewhere could lead to a better deal. Switching home loans is called refinancing, and it can save you thousands of dollars or more.
Here's a simple way you can crunch the numbers on your current home loan and work out how much you can save.
- Step one: Start by finding your current interest rate. This should be on your most recent home loan statement, or you can log in to your lender's banking site to see it.
- Step two: Compare home loan rates and look for a suitable home loan with a lower rate. Be sure you compare like for like. For example, if you have a loan for an investment property then look at investment loans, not home loans for owner-occupiers.You should also compare loans with similar features. For example, does it have the ability to redraw?
- Step three: Check how much is left to repay on your home loan. This will be your new loan amount when you refinance.
- Step four: Compare monthly repayments. Use a loan repayment calculator to see how much your repayments will fall with a lower interest rate.
Let's use the method above with a hypothetical example to show you just how simple it is. Let's say you borrowed $500,000 on a 30-year variable rate home loan with a 3.30% interest rate (this is around the average, according to Finder app data). You've had the loan for 5 years and you have $450,000 left to repay (so for this example, we'll use a 25-year term for the new loan).
You find a new, lower interest rate. In this example, we've used the Basic Variable Home Loan from People's Choice with an interest rate of 2.19% (comparison rate 2.20%), for new borrowers with LVRs of 80% or below.*
Here's how the numbers break down:
Current loan
- Current interest rate: 3.30%
- Loan term: 30 years
- Loan amount: $500,000
- Current monthly repayments = $2,189
New loan
- New interest rate: 2.19%
- New loan amount: $450,000
- New loan term: 25 years
- New monthly repayments = $1,949
- Difference = $240 a month
- Yearly saving = $2,880
*Rate is correct as of 18 March 2022. The calculation is a hypothetical example and doesn't take into account loan fees or other interest rate changes in future. The comparison rate is based on a loan of $150,000 over a 25 year term. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
Now this is just a hypothetical example. It's unlikely that your interest rate stayed at 3.30% for 5 years. And we can't predict how rates will change in the future. But this simple calculation shows just how much refinancing can save you when you get a lower rate.
And you could lower your repayments even further. In the calculation above, we used a 25-year loan term. But you could refinance to another 30-year loan term. This means your repayments would shrink even further to just $1,706 a month. That's a massive $483 a month difference.
But there's a catch here: Switching to a new 30-year loan effectively extends the life of your loan, keeping you in debt for longer. While your monthly repayments are lower, you will pay interest for a few more years than if you'd repaid it in 25 years.
You could also switch to a new 30-year loan but make extra repayments or put the money in an offset account. This way you can repay it faster while enjoying lower repayments at the same time.
Think it's time to refinance? Crunch the numbers for yourself. You might be surprised just how much you can save.
