You own a home, you have a home loan, and you got a pretty good rate, right? Wrong!
The average owner occupier principal and interest variable home loan rate sits at around 4.13%, but unless you’ve scored in the threes or lower, the banks are slowly milking you dry.
We don’t know what we can’t see, and that’s why we have health checks, but how often are we doing home loan health checks? Your life has probably changed over the years and most likely since you first took out your home loan (wedding, kids, big fat promotion – you get the idea), so why shouldn’t your mortgage rate change? Or maybe your life hasn’t changed all that much, but your loan has – your original rate becoming a bygone figure as rate creep has increased your loan repayments significantly over time.
Refinancing your home loan is simply swapping your existing mortgage for a new (and hopefully better) one, and that often means finding a new lender as well. The major lenders tend to give all the best deals to new customers rather than their faithful existing ones, leaving you feeling a little unloved and under-appreciated. They cheat on you, so here’s why it’s time to cheat on your bank!
Mira Hohn, Chief Product Officer of fintech start-up Athena, gives us her top 10 Reasons to Refinance your Home Loan:
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1. Save Money
According to the ABS, the average loan in Australia is $384,700 and while many of us have mortgages that are much higher or lower, let’s use this amount as our example. If you refinanced your 4.13% rate to 3.59% on a standard variable loan over 25 years, you would save $114 per month on repayments ($1945 versus $2058). Over a year, that can add up – to more than $1,300. You could plough the savings into other household expenses, or use that money for a holiday, renovations or shoes. Whatever floats your boat.
2. Pay Your Home Loan off Sooner
Using the same example above, if you put those savings straight back into your home loan, you could pay off your home loan five and half years earlier, and save a whopping $53,136 in interest in the process. Yep, that’s a five-figure saving right there. Don’t underestimate the value small amounts of money makes on a loan over time.
3. More Equity Means Better Rates
If the value of your home has gone up since you bought it, it means you have more equity in it. This can mean access to better interest rates as well. For example, if you borrowed $450,000 on a $500,000 property that is now valued at $600,000, your equity has increased from 10 to 25 per cent. Note it can also work in reverse, especially if you bought in the peak of a cycle and are in an area where prices have softened. Use a few of the readily available online tools to get a sense of the value of your property today.
4. Switch to Interest Only or Fixed Rate
Perhaps you want the certainty of knowing what you will pay for a set period (fixed rate) or need to lower your payments (interest only) for a time. Often changing to a fixed rate is useful when you have significant life changes, like a new baby, and want the certainty of knowing how much you will pay each month. Or you may want to use interest only for temporary personal reasons or investor strategies. Beware, however, the veil has been lifted on interest only, and you should know that you’ll end up paying more over the life of the loan due to not reducing the principal loan amount whilst you’re only paying the interest. Fixed or interest-only loans are available for a set term, usually between one and five years.
5. Your Fixed or Interest-Only Rate Period Is Expiring
You may already have a fixed or interest-only loan on your home that will expire or finish soon. Most likely your loan will swap back to a variable rate, and often it’s not going to be a great rate and will give you even more of a shock when you see the difference in your payment amounts. This is an ideal time to refinance and make sure you find the best interest rate out there. Make a small amount of effort to get the rate you deserve and begin to line your own pockets, not the banks. Comparison sites are a great way to check out the low rates out there and be sure to include non-bank lenders in your comparison pile, as sometimes their deals can be better with less fees.
6. You Earn More and Can Afford More
If you’re earning more than you did when you took out your loan, it could be time to step it up a bit. You could consider refinancing to a shorter home loan term, helping you to become mortgage-free sooner, and saving thousands in the process. You could also choose to pay off your loan faster, by simply paying more than the minimum. This could be coupled with a refinance to a lower rate lender to get more bang for your buck or arranged on your current loan if your lender offers this without any early exit fees. Check the fine print on this one.
7. You Want to Borrow More and Take Cash Out
If you need some extra cash and have the right amount equity in your home, you can refinance to access some of this money. Cash-Out Refinancing is often used when you want a deposit for an investment property, or to buy shares. It can also be used as a cheaper alternative to a personal loan. Make sure you do your sums, however, as adding an extra amount to a long home loan could cost you more over time than shorter loan. You can combat this by paying extra to get rid of the amount you’ve borrowed in say 5 years, not the full 25 or 30 years.
8. Refinance to Renovate
‘Refinance to Renovate’ is generally used for major structural work on your home, such as a new pool or additional story, where the value of your house will be higher once renovations are complete. You can borrow against the value of your new and improved property. Not all lenders offer this so be sure to check upfront, and shop around to not pay a premium.
9. Debt Consolidation
Replacing high-interest personal loans and credit card debt with a single low-interest payment is an excellent way to manage your household expenditure. The trick is to make sure you stick to your regime and don’t replace the old debt with more personal loans and credit cards. Again, beware transforming a short debt duration with a longer one. If you roll a shorter loan term into your mortgage – do the sums to check if you will be better off by the time you’ve paid it off in 25 years. And if not, do what you can to pay that portion of the debt down faster. It will make a huge difference.
10. Get New and Exciting Home Loan Features
Sure, home loan features are not that exciting to most people, but when they save you money, in terms of interest payable like an offset account or redraw facility can, or give you cool benefits like a mortgage holiday, then people start to wake up. Sometimes the basics can be just as exciting, so seek out a lender that doesn’t charge fees and offers you flexibility to change your loan settings as you need. Seriously, check it out. Your current home loan’s probably not ticking all your boxes, and you didn’t even notice. It costs nothing to look into refinancing and see if your current home loan could do with a makeover.
Have you refinanced your home loan lately? Or do you have a sneaking suspicion you could be doing better if you did your research? Tell us in the comments below …