By Guest Blogger, Louisa Sanghera, Principal Broker,
Zippy Financial
When is it worth refinancing?
With interest rates at – or hopefully very near! their peak – the cost of having a mortgage is taking an even larger share of your household budget.
So, it makes a lot of financial sense to carefully evaluate every expense, including, importantly, your home loan. Making sure you are getting the very best deal on your home loan.
But how do you evaluate when it is worthwhile to refinance? It takes a load of time and effort to collate all the relevant documents and shopping around for the most competitive lender can lead to a minefield of questions and confusion.
What are the potential savings of refinancing?
You might think a loan is a loan – they’re all pretty similar, right?
Not quite. There are big differences between lender’s rates, sometimes as much as 2% or more, so it’s really important to check your loan regularly to make sure you’re not paying more than you need to.
For instance, right now on our panel of lenders, we have home loans as low as 5.89% ranging up to 7.30%.
What are the risks, if any, of refinancing?
While refinancing is fairly low risk, there are a few potential downsides to be aware of:
• Loan term: Say you’ve had your mortgage for 3 years; you currently have 27 years left on your loan term. If you refinance to a fresh 30-year loan term, your repayments will be lower, but it will take you another 3 years to pay off the loan. You can always make extra repayments to pay the loan off sooner though.
• Fees: There can be several fees including exit fees on your existing loan, valuation fees on your new loan, application fees, and break fees. It could cost hundreds or even thousands of dollars to switch your home loan. But these fees can be more than offset by the interest rate savings, if you refinance to a much cheaper loan.
• Lenders Mortgage Insurance (LMI): If your equity is less than 20% of the property value, your new lender will require you to take out LMI when you switch. For instance, if your home is worth $1m and your loan is $850,000, then you have 15% equity, which means you’ll pay LMI. This is a type of insurance that protects the lender if you default on your home loan, but you actually pay the premium – and it can cost tens of thousands of dollars.
• Your credit score: Every application for credit goes on your personal credit file, so if you apply to refinance a number of times, it could impact your credit score.
How to decide if it’s worth refinancing?
To make refinancing worthwhile, you need to save more than it will cost you to make the switch.
A finance broker can work through these calculations with you and show you exactly how much you stand to save by moving to different lenders. A good broker will do the analysis and lender comparisons and explain them to you in plain English.
You can always make some estimations yourself to help you decide if it is worth it. A few things to keep in mind:
• The costs of refinancing generally can start from the $600 mark
• If you get a lower interest rate, you’ll make those savings for many years to come, not just the year ahead.
• You may be able to refinance to a better loan with a cashback offer, which could save you much more than the costs and fees.
• Refinancing may be a way to lower the interest rate you’re paying on other debts, like personal loans and car loans, if you roll them into your mortgage.
There’s a range of things to consider around refinancing and you may have questions specific to your situation, and that’s where Mortgage Brokers can help. Their service is usually 100% free of cost too.
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