How to get the most out of refinancing

Everyone wants to pay less on their mortgage, and refinancing is one strategy to help lower your interest rates – but is it worth it? We take a look at how you can get the most out of refinancing.

Why refinance?

Generally, people refinance to negotiate a better deal on their home loan and pay it off sooner. Depending on your situation, you should be able to save money by taking advantage of lower interest rates, or new products that weren’t available when you first negotiated your home loan.

To help put it in perspective, let’s say you previously took out a $300,000 loan at 7.5% over 30 years with monthly repayments of $2,098. If you refinanced to a new loan at 4%, you could save $239,543 ($665 per month) over the life of the loan by making the minimum repayments of $1,432 per month.

Once you’ve refinanced, if you continue making the same minimum repayments as your previous loan ($2,098 per month), you’ll potentially save $346,912 and pay off your mortgage 165 months early.

Make it work for you

Take advantage of your refinanced loan by:

· Consolidating debts: Home loan interest rates are often lower than those for other forms of credit, so you can save money by consolidating debts such as credit cards or personal loans into your mortgage. Beware, however: paying off a short-term loan over a longer period will likely incur extra interest and fees over the longer term. Put the money saved from consolidating your debts into your mortgage, as if you were still repaying the other debts, to reduce the overall debt faster.

· ‘Splitting’ your loan: Nominate a portion to be charged at a fixed rate of interest for a set period of time, with the balance charged at a variable interest rate. When the fixed rate period ends, the loan reverts to the variable interest rate. You benefit from the security of the fixed rate and flexibility of a variable rate loan and are impacted less if interest rates rise.

· Having an offset account: The balance of your offset account is subtracted from the remaining principal amount before interest is applied, meaning you spend less on interest over the course of your loan.

· Making extra repayments: Any payments made on top of your regular repayment will save money by reducing the amount of interest you’ll pay.

When should you consider refinancing?

Life brings change, and your mortgage needs to keep up: maybe you now have a partner, a young family, a new job that pays more or has become empty nesters with extra cash on your hands. If the terms of your current loan don’t allow you to pay more (or less) on your principal amount, it could be worth considering refinancing into a more flexible arrangement.

Refinancing or loan switching can save money, but you might incur costs such as exit and establishment fees, government charges and administrative or legal expenses. These costs need to be weighed against the benefits to determine if you’ll save in the long run.

Today’s home loan market is very competitive, and there might be a loan out there offering the features and flexibility you want. Before you make any decisions, however, be clear on your reasons for refinancing. It’s also a good idea to speak to an experienced mortgage broker (who will have access to mortgage broker software) or financial expert to ensure you’re making the right move for your financial situation.

Maximising Benefits

Once you’ve refinanced, consider maximising the financial benefits further. If your new agreement has a lower interest rate, you might choose to keep making the higher payments you were used to before refinancing. This tactic will not only shorten the loan period but will also reduce the total interest paid significantly. Additionally, make use of any flexible features offered by your new loan, such as redraw facilities or the ability to switch payment frequencies, to tailor your mortgage to your changing financial situation.

Evaluating Interest Rate Trends

Keep a close eye on interest rate trends after you refinance. If rates continue to drop, it may be beneficial to refinance again to secure a lower rate. Conversely, if rates are expected to rise, locking in a fixed rate might protect you against future increases. Staying informed about market trends can help you make timely decisions that could save you money.

Long-term Financial Planning

Refinancing provides an opportunity to reassess your long-term financial goals. Consider how your home loan fits into your broader financial plan, including retirement planning, investments, and savings. Your mortgage should not be viewed in isolation but as part of your overall financial strategy to ensure it supports your long-term objectives.

Understanding Costs and Benefits

Before proceeding with refinancing, it’s crucial to understand all associated costs and potential savings. Calculate the break-even point—the time it will take for the savings from a lower interest rate to surpass the costs of refinancing, such as application fees, legal costs, and any penalties for early repayment of your old mortgage. This calculation will help determine if refinancing is financially beneficial in your specific case and how long you need to stay in your home to make it worthwhile.

Risk Assessment

Consider the potential risks involved with refinancing. For example, extending the term of your loan might lower your monthly payments but could increase the total amount of interest you pay over the life of the loan. Also, be wary of variable-rate loans that might start with lower interest rates but could increase significantly over time. Assessing these risks against your financial stability and future income prospects is crucial.

Financial Health Check-Up

Use the refinancing process as a chance to perform a comprehensive check-up of your financial health. Evaluate your debt-to-income ratio, check your credit score, and consider your job security and income stability. This holistic view will help you make a more informed decision about whether refinancing is right for you at this time.

Leveraging Equity

If you’ve built up significant equity in your home, refinancing can also provide an opportunity to access this equity for other important expenses, such as home renovations, educational costs, or consolidating higher-interest debt. However, it’s important to do so cautiously, as leveraging home equity increases the total loan amount and, potentially, the loan-to-value ratio.

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