Refinancing could save you thousands – and give you greater flexibility

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Reducing the interest you pay on your mortgage could help you save thousands of dollars in interest over the period of your loan. As there’s plenty of competition in the home loan sector, it could be worth looking around for a lower rate.

What is refinancing?
Refinancing is the process of replacing an existing loan with a new one. When it comes to home loans, it means your existing home loan is paid off and replaced with a new one. This is different from a second mortgage, where you draw on the equity you have built up in your home.

How can it help me save?
If you were paying 5.37per cent interest on a principal and interest home loan of $600,000 for a 25 year term. Your monthly principal and interest payments per month will total $3,648.00. If you swapped to a mortgage at a lesser rate of 5.24 per cent, however, you’d pay just $3,602 a month. Over 25 years, that saving each month would add up to $13,800 in total savings.1
Another savings option when refinancing is to choose a loan with a lower interest rate but continue with the same monthly payments as you were making on the higher rate. This approach will see you pay less interest and pay your mortgage off faster. Alternatively, refinancing can help save money by consolidating debt from high-interest credit cards or personal loans into a single home loan with a lower rate of interest.2

Features to consider
Most mortgages offer a number of features and benefits. If you’re considering refinancing, it’s a good idea to think about which features are important to you before starting a search for a lower interest rate.
• Variable rate or fixed rate. A fixed rate gives you more certainty over the longer term. A variable rate fluctuates with the market, so you’ll save when it’s down but there’s always a risk it will rise. (In January 1990, for example, the Australian home loan interest rate reached an all-time high of 17.5 per cent.)
• Offset account. Cash in hand can be offset against your loan balance until you need to spend it, potentially saving interest.
• A line of credit. If you have a lot of equity in your home, a lender might be prepared to offer you a relatively inexpensive line of credit secured against the property.
• Repayment flexibility. Repaying a loan fortnightly rather than monthly can make it easier to fit in your budgeting plans.
• Early pay out. You may want the option of paying a loan out early with minimal penalty.

Weighing up the costs
There can be costs associated with refinancing and it’s important to factor these in to your decision-making. For example, if you took out your loan before 30 June 2011, the lender might be able to charge you an exit fee for terminating the loan ahead of schedule. If yours is a fixed-rate mortgage, you might have to pay a break fee.
For a new mortgage, you may have to pay an establishment fee and the ongoing administration fees could be higher than you’re currently paying. And if your loan has redraw facilities, there may be a charge each time you take money out of your account.

Do the maths
You can use an online mortgage calculator to work out what repayments will be for different loan amounts at different interest rates. You can also compare fees and charges to ensure they won’t offset any savings in interest over the life of a loan. The Australian Security & Investment Commission’s MoneySmart website has a useful mortgage switching calculator that can help you assess overall costs.

A broker can help
Refinancing can be a serious financial decision with a number of variables to consider. A good broker can help establish the type of loan that may work best for you, how much you can borrow and any extra features you want. They can then gather information from many different lenders and help assess the costs and benefits associated with each loan. As well as doing the legwork for you, they can guide you through the refinancing process and apply their knowledge and understanding of mortgages to help you achieve the best outcome if you decide to go ahead.

Sources:
1 Rates from: www.nab.com.au/personal/interest-rates-feesand-
charges/interest-rates-for-home-lending
Calculated via: www.moneysmart.gov.au/tools-andresources/calculators-and-apps/mortgage-calculator#!howmuch-
will-my-repayments-be
2 www.fool.com/mortgages/2016/10/30/how-much-couldyou-save-by-refinancing-your-mortga.aspx

Helpful tools & calculators
www.moneysmart.gov.au/tools-andresources/calculators-and-apps/mortgage-switching-

The Top 5 Reasons Peolpe Refinance Their Home Loan

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1.. To save money
By far and away the biggest reason people chose to refinance their home loan is ‘To save money’. Lowering your mortgage payment can also save you hundreds of dollars per month that could be used to pay your home loan off faster, pay for the kids education, update your car.
What would you spend the extra savings on?
2.. To access funds for various personal or financial goals
Other uses for a lump sum in cash are literally endless – you could use your equity to buy your family that long overdue overseas holiday you’ve always wanted or even use it to invest in a business or shares
3.. To release equity for property investment
Property investment is currently one of the most popular ways of building wealth for your future. Whilst saving the deposit to purchase a second property may be difficult for many, rapid rises in property values over the least few years has provided an opportunity for many to refinance and release equity in their home to use as a deposit instead.
4.. To renovate or extend your home
Renovating or extending your current home to meet the needs of your growing family or changing lifestyle is often a better option than purchasing an entirely new home. By renovating or extending, you will be able to create the home that exactly meets your needs and if you’re careful about the improvements you make, perhaps even increase its value at the same time. Even though you will need to access your equity, you may in the end also improve the value of your home to offset this cost.
5.. To consolidate debts
Your home loan interest rate is probably the lowest form of interest you will need to pay on any loan in Australia. Credit card interest rates can be as much as four times higher than your home loan interest rate and this can make credit card debts difficult to pay off. Other expensive debts like car loans or personal loans can also prove to be a drain on your finances.
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Finances In A Mess? This may well be the answer…Debt Consolidation

Have you ever had that feeling that you’re drowning in debt, that your finances are in a real mess?

Well, debt consolidation may well be the answer

Consolidating your debts will in most cases reduce your overall monthly repayments and allow you to make one monthly repayment instead of several because you’ll be dealing with one lender only. Take the example of a client of mine, Beth (name changed for privacy reasons) an Office Admin. Beth came to me with emotional and financial troubles. Beth had been sucked into getting a couple of credit cards from the banks. She had a few impending expenses, her daughter was due to get married and she also wanted to update a few of her home appliances.

Before long she had maxed out the two cards and at best, on her salary, was only just able to meet the minimum monthly required repayments on the cards each month. So the debt was not reducing at all.

Here’s what we did to help her fix her situation.

To her credit she always paid her home loan on time…phew…but what she now found was she had no spare cash at all and was simply caught in a vortex of debt and she was beginning to feel there was no way out. Beth needed some help. I told her that in most cases there is a solution. After meeting and discussing her situation with her personally, we were able to ease her financial burden by consolidating the credit card debt into her home loan and by doing so, freed up approximately $600 a month in cash flow.

Beth was extremely relieved, she began to feel lot better and optimistic about her situation, and more importantly, she was in the position to repay her credit card debt and took great delight in chopping up those credit cards!

I’ve consolidated debt for many of my clients. If this is something I could help you with, contact me for a chat. It really is easier than what it might seem.

Use Your Equity To Pay Off Your Home…How?

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Use your equity…
This one is a little left of centre, considering in previous posts I have been showing you ways to reduce debt. Now, I am going to suggest borrowing more, ultimately to reduce debt. When I first entered the world of finance broking, I would hear stories about people paying off their loan in 10 years. I always thought that only the wealthy could do this; there was no way I could manage to double my repayments to make this happen. Again with our $400,000 loan, at 6%, I would need to pay $2,050 extra per month, on top off the already $2,398. Whoa, a bit of an ask? However, to achieve this aim, you could purchase a well selected investment property. I must stress that this really relies on choosing the right property to achieve capital growth, a property that will double in value every 10 years. This strategy may not be suitable for everyone.

Case Study

scenario
• Current home value $500,000.
• Current mortgage $300,000.
• Current loan repayments $1,610 per month.
• Interest rate 5% per annum.
• Time remaining with mortgage 30 years.
• Total repayments over 30 years $579,438.

Position Year 1.

 

 

 

For ease of illustration I have not included costs such as stamp duty etc. As a rule of thumb in Victoria one should add 5.5% to the purchase price to ascertain associated costs for an investment property.

Position Year 10.

 

 

 

Sell investment property for $800,000 and repay both investment loan and home loan leaving no debt on your current home loan.

End Position
Investment property sold for $800,000. Investment loan of $300,000, paid out. Investment loan of $100,000 attached to own home paid out. Home loan of $300,000 paid out. Own home worth $1,000,000 with no debt. Cash in bank $100,000, time to invest again.

Disclaimer and notes.

Does not take into account principle and interest repayments on existing home loan, balance after 10 years = $244,000. Selling costs and capital gains not taken into consideration for this example. The information provided is of a general nature and we would encourage you to discuss your personal circumstance with your broker or financial planner and or accountant. You should seek professional advice before you implement any new approach to ensure that it is appropriate for your circumstance.
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