Quick Refinance Guide

Quick refinance guide

Like most positive changes in your life, at first it can seem daunting, but once it’s done you were left wondering why on earth didn’t you do it sooner.

 

It can be helpful to consider what your time is worth. If the benefit outweighs the investment of time then ask yourself, why wait any longer.

 

Refinancing can be worthwhile for various reasons and even small changes in rate can have a profound impact on your pocket. Here are the top reasons broken down:

  • Lower repayments

  • Repay loan sooner

  • Protect against rate increases

  • Simplify debt

  • Top up for something else

  • Renovate

  • Release equity

 

Lower Repayments

Finding out you’ve been unnecessarily throwing money at your banker is a nightmare that can make most want to bury their heads in the sand.

 

Our first tip is be kind on yourself and remember it’s not your fault. A recent productivity commission found that banks systematically work to increase your rates above what they are offering new customers. Here’s what you can do.

 

Lowering a 4.2% p.a. interest rate by just 50 points to 3.70%p.a.  would mean almost $100 extra in your pocket every month for a $350,000 loan with 25 years remaining.

 

Extending the term of that same loan to 30 years would reduce repayments by a further $179 a month. But be careful - adding years to your loan will add a lot more interest to your total mortgage repayments.

 

Repay Loan sooner

Small changes to your loan early on can have a big impact on your loan term. That’s because home loans are compound interest equations. Which basically means you’re paying interest on interest on interest….

 

For example

By increasing your monthly loan repayments by just 10% a month from day 1 of an example mortgage (say 30 year, $350,000 mortgage at 3.7%) you would save about 4.5 years off your term and $39,500 in interest.

 

But wait just 5 years to start paying the 10% extra and you'll miss out on a third of those savings, That's about 1.2 years and more than $13,000 in interest savings.

Reinvesting interest saved from a lower rate as soon as possible could mean years off your mortgage.

 

Just 50 basis points over a 25 year mortgage would free you 2+ years earlier from your mortgage. Now what would retiring 2 years earlier mean to you?

 

Protect against rate increases

If what goes up must come down - so must what goes down come up. Or at least that’s what the long term forecast for rates in Australia is.

 

Interest rates in Australia have never been lower. But pressure is mounting and according to many, as soon as the economy strengthens rates are on their way up again.

 

Fixed rates typically move ahead of variable. This means if you’re thinking it’s time to fix, the market will already be ahead of you.

 

Unless you think rates are on their way down, now might just be the time to beat the market.

 

Pro tip: Look for a flexible-fixed option if it’s available. Flexible fixed rates are fixed, but come with a 100% offset account so you still have the flexibility to repay extra and redraw when you want.