7 reasons to refinance and save thousands
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? Now what would you do if I said you could be paying thousands of dollars more than necessary? You’d start paying attention I bet, unless of course you’ve got rocks in your head and I don’t believe anyone that reads my articles has got rocks in their head. But if you’re still wondering what I’m talking about, you need to read these seven reasons for refinancing.
Let’s do some simple maths. Say you have a $500,000 loan and 25 years left on your mortgage. If you go from a 5% rate to our 4.54% rate, you’ll save nearly $40,000 during the course of the loan. Your monthly repayments also drop from $2,933 to $2,801. So that will see you at least $35,000 ahead, if not more!
I used a 5% rate above, but the reality is that most people are paying closer to 5.24%, so lets use that rate and assume you have a $1 million mortgage with 25 years remaining. If you go from 5.24% to 4.54% then you will save $120,000 over the life of your loan.
Adrian Sheahan, manager of lending operations at Switzer Home Loans agrees with me that most people don’t understand how much they can actually save.
Think of it this way. If somebody was to hand you a cheque for $120,000, or even $35,000, in 25 years time, would you say no?
Another reason to consider refinancing is because the advertised rate that you signed up to might not be the real rate you’re paying.
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%.
So when considering refinancing, make sure you look at comparison rates – not rack rates – and ask your lender for a key facts sheet.
It’s no secret that Australians have a love affair with real estate and many of us have an investment property.
Depending on when you bought your home and your investment property (or properties) you may have several different loans from different lenders. This can be an awful mess come tax time.
“Where borrowers have two or more loans, the accounting can get messy if they are not clearly defined,” Adrian explains.
“A refinance and restructure can sort that out. Too many loans also guarantees too many fees.”
This gets a bit complex, but stick with me. At some point you might have thought it was a great idea to have an interest-only loan for your investment property. After all, it’s a much lower repayment and you’re expecting your big payout will be on capital growth.
However, in some instances, your interest-only mortgage might be better suited to a principal and interest structure in order to build equity for the next investment.
Adrian says, “This might suit long-term lower risk profile borrowers that want to reduce debt as quickly as possible.”
It doesn’t mean that a principal and interest loan is always better, it just depends on your circumstances and what you want.
“Either way, if the structure is wrong, their strategy objectives won’t be met,” Adrian says.
A good loan professional can help you sort out the right strategy.
With interest rates so low, it’s a great time to lock in a fixed rate. We’re offering a 4.68% comparison rate for a five-year fixed loan.
Rates are low now, but nobody thinks they’ll be at these levels forever. When the economy starts pumping again, and trust me it will happen, interest rates will start to increase.
If you have a fixed rate option, there’s a real possibility you could pay your mortgage down in five years so you wouldn’t have to worry about the new higher variable rate when your fixed term is finished.
A common investment strategy is to use equity you’ve built in your home to buy an investment property.
“Usually the first investment relies upon the equity in the home to satisfy the lender’s security requirements, so there is a mortgage over both the home and the investment property,” Adrian says.
“But given the growth in property values, if the borrower has also reduced their loan size, they may well be in a position to release the mortgage over the home and rely solely on the investment properties.”
That means your home might finally be mortgage-free.
I know a lot of people don’t look into changing their mortgage because they think it’s going to take a lot of time and money, but surely all the points I’ve outlined above (particularly the first one) prove that it’s worth it.
And finally, let me say that if you use a good mortgage specialist like Adrian, it’s a one-stop process that takes a very short amount of your time.
“We do the paperwork, organise the solicitors etc. and you speak with one person all the way through, not a call centre,” Adrian explains.
And if you’ve got some misguided sense of loyalty to your bank, ask yourself, do they really deserve your loyalty if their current rate is so high? They’re only taking advantage of you, which is why it’s time to switch.