7 reasons to refinance and save thousands
Last year Peter wrote an article under this headline outlining why those of us with residential loans should be giving them a financial health check. He asked the question ‘Could you tell me your mortgage rate off the top of your head? No? When was the last time you checked it? Last week, last month or last year?’
He then provided seven good reasons for you to review your current loan and pick up the phone and talk to a mortgage professional. Given the changes in the lending landscape over the past six months , now is a great time to review that message.
1. The first, and obvious reason is to save money.
Most people don’t understand how much they can actually save by getting a better deal on their borrowings. The sums are quite simple and quite surprising. Let’s assume you have a $500,000 loan and 25 years left on your mortgage. If you go from a 5% rate to our 4.09% rate*, your monthly repayments will drop from $2,922 to $2,664 and you’ll save nearly $78,000 over the course of the loan.
If you’re smart, you will maintain the $2,922 repayments you are currently making and that will take a further $47,000 from the total loan payments over the life of your loan.
Of course there are some basic assumptions with these numbers as Peter put asked, If somebody was to hand you a cheque for $135,000, or even $78,000, in 25 year’s time, would you say no?
2. Check the comparison rate
The interest you pay on your loan is not the only cost. Fees such as establishment fees and monthly fees are a direct cost to you. These need to be taken into account when you compare loans.
For that reason, over a decade ago, a law was introduced that required lenders to use rates that incorporate all fees and charges of their product into the one flat rate.
This is called the comparison rate. It meant that if Lender A offered a rate of 6.9% and fees of 0.5%, while Lender B offered a 7% rate but fees of just 0.1%, then Lender B would be able to show it was the cheaper offering by using one flat rate of 7.1%, compared to Lender A’s 7.4%.
If you really want to get an accurate figure of the loan cost, make sure you look at comparison rates – not just the advertised rates – and ask your lender for a key facts sheet.
3. Simplify the administration of your investments
I’ve seen some awful messes when it comes to loan structures. Many of the borrowers I speak with have single loans that incorporate both personal and investment debts but can’t tell you how much is attributable to each purpose. That makes it very difficult to manage your finances efficiently and helps line the pockets of your accountant when you need them to sort it out.
Most residential loans have the capacity to be split into portions. Use these portions to define the amounts you have borrowed for different purposes. That way you can track the expenses for each purpose easily, allocate payments accordingly and save a lot of money in accounting fees.
A jumbled structure can also leave you paying too many loan fees.”
4. Is the repayment structure right for you.
Last year, APRA, the banking regulator turned up the heat on lenders in respect to investment loans and interest only borrowings. The goal of course was to secure the health of Australia’s banks but it also focussed debate on how loans are, or in the case of Interest Only loans, how they are not repaid.
Many lenders now encourage borrowers to make Principal and Interest repayments by offering rate discounts for that repayment structure. This doesn’t mean that a Principal and Interest loans are better, there are a number of reasons why Interest Only repayments might be more suitable; but it does mean that you should be reviewing your repayment structure and the options available.
Either way, if the structure is wrong, your strategy objectives won’t be met so ask a professional who can give you the right answers..
5. Moving from a variable to fixed
With interest rates so low, it’s a great time to lock in a fixed rate if that suits your circumstances.
If you speak with someone who had loans during the days of 15- 20% interest rates, they’ll happily tell you how low rates are at the moment and how much it cost them back then. Nobody who has borrowed in the past thinks they’ll be at these levels forever. So if you are looking to secure your repayments at these low levels for the next 5 years, why not consider a fixed rate loan. Fixed rate loans are less flexible in terms of repayments and redraw but a popular strategy to counter that is to split your loan and have a fixed rate portion and a variable rate portion. That way you can have the best of both worlds.
When investors purchase their first investment property, they commonly use the equity in their owner occupied home to support their new borrowings. This satisfies the lender’s security requirements, but leaves them with a mortgage over both their home and their investment property.
The past few years have seen significant growth in property values in many areas with corresponding increases in home owner and investor equity. If the borrower has also reduced their debt, they may be in a position to discharge the mortgage over their owner occupied home leaving just the mortgage over their investment properties.
For many borrowers this is a significant personal goal and financial milestone and one that they are not aware they can achieve right now.
7. It’s easier than you think
A common misconception is that refinancing will take a lot of time and money. Yes, there is a little time and paperwork but not as much as you would think. The first step is to do a quick health check to establish if your current loan is unsuitable or too expensive. That can take as little as 5 minutes and won’t cost you a cent. As highlighted in point 1, if you could save over $135,000 by making a 5 minute phone call, why wouldn’t you
If these reasons get you thinking, grab the phone and speak with a mortgage professional or go to the Switzer Home Loans website for information on what you should be considering. 5 minutes could save you a small fortune.
*Variable and comparison rate