Why should I refinance my home loan?

Saving money on your repayments

It’s almost a guarantee that the home loan interest rate you signed onto with your mortgage will have changed, but thanks to an increase in competition, there are potentially loans that have cheaper rates. Even shaving a few basis points off your home loan interest rate can save you a lot over the life of the loan.

How Different Rates Compare over 30 years

Let’s say that, as an owner-occupier, you have a $500,000 home loan at 3.00% p.a. interest. Your monthly repayments would be $2,108 a month over a 30-year loan. For ease of comparison let’s assume this rate does not change over the next 30 years. Over the life of the loan, you will pay $258,887 in interest, and a total of $758,887.

If you were to lower that rate by just 0.10% to 2.90% p.a. then your monthly repayments would be $2,081 per month, a saving of $27 per month. This doesn’t sound like much, but over a 30-year term, that $27 per month becomes $9,673.

If the rate was 0.25% lower, then your interest would go from 3.00% to 2.75%, meaning your monthly repayment would be $2,041, a saving of $67 a month. Over the life of the 30-year loan that saving becomes $24,053. 

If your rate was 2.50%, then the 0.50% saving from a 3.00% loan would mean $132 less per monthly repayment and a life-of-loan saving of $47,669! Here it is laid out in an easy table.

Repayments for a $500,000 loan over 30 years.

When Refinancing, Consider the Loan Term

The above example simply illustrates the differences a small change in rates can make on the bigger picture. But it doesn’t show the reality of refinancing as all the loans are for 30 years and it is unlikely you would refinance before your first repayment was due.

Refinancing, by definition, is usually done after a period of already paying down a loan. How long that period is will be up to the homeowner and their circumstances, but there is potentially a false economy if you were to simply take another 30-year loan after paying your current loan off for a period of time. You could pay more, because you are paying it for another 30 years. Here is an example.

Refinancing after 5 years of paying a $500,000 home loan at 3.00% p.a. The Loan amount is now $444,531.

Calculations should be used as an indication only.

Let’s say you have that $500,000 loan at 3.00% interest, and have been paying it for 5 years, at $2,108 a month. For the next 25 years, you would pay a total of $632,406 to finalise your home loan; $187,874 of the loan amount would be interest.

Now, if you were to refinance your balance after five years – $444,531 – at 2.75% interest for 30 more years, your monthly repayment would be reduced to $1,815, as shown in the table above in Option 1. That's a saving of $293 per month, which looks good. But your total interest would be $208,782. Over 30 years, you would pay an extra $20,908. Plus, it’s another five years paying a home loan.

When refinancing, it’s worth considering whether matching the remaining period on your existing loan with your new loan is right for you. As shown above in Option 2, if you refinanced the $444,531 balance at 2.75% for 25 years, your monthly repayments would still be $57 lower – $2,051 – and you would only pay $170,670 in interest over the life of the loan, saving $17,204. Mission accomplished!

Please note: Depending on your Loan-to-Value Ratio (or LVR), you may need to pay Lender's Mortgage Insurance (LMI) when you refinance. Find out more about how this works in when to refinance. 

 

Paying off your loan sooner

If your interest rates go down through decisions by your bank, then you could enjoy paying less in monthly mortgage repayments or continue paying your home loan at the current repayment amount. The extra repayments go towards paying down the principal, which results in less interest over the loan term, as interest is calculated on the remaining principal.

For example: If, after 5 years of paying your $500,000 loan at 3.00% p.a., you have refinanced your current principal of $444,531 for 2.75% over 25 years. Your monthly repayments are $2,051, a saving of $57 a month. However, if you maintain a repayment of $2,108, you will save an additional $7,159 and almost a year off your mortgage. Here it is in an easy table.

Refinancing after 5 years of paying down a $500,000 home loan at 3.00% p.a. The Loan amount is now $444,531 and the remaining term 25 years.

Calculations should be used as an indication only.

Refinancing can be a way to accelerate this process. Shopping for a better home loan rate and improved repayment allowances (like no fees for extra repayments or maximums) could get your home loan out of your life even sooner. As can be seen above, if you manage to refinance to 2.50%, a rate 50 basis points lower than 3.00%, then you can save a sizeable $46,347 in interest and shave almost two years of your loan term.

Check out IMB's Refinance Home Loan Calculator to research how home loan refinance offers compare.

 

Adding features and flexibility

The interest rate is not the only factor of a home loan to take into consideration. Some low rate loans have more fees, less features or stricter conditions regarding loan repayments. Other loan products offer a greater range of features such as offset accounts and redraw facilities, which provide flexibility and opportunities to reduce interest paid. Some home loan packages include low-rate/low-fee credit cards or multiple accounts-one annual fee products.

Like everything, there is generally a price to pay with more features and choice, either a higher rate of interest and/or more fees. It means you could pay more than expected for the home loan over the long term, and it is worth shopping around for what you need. This is why it is crucial to use the Comparison Rate A comparison rate helps you work out the true cost of a loan. It reduces to a single percentage figure the advertised interest rate plus fees and charges relating to a loan. when comparing home loans.

First, let’s look at the features in detail.

Offset Account
This is a savings or transaction account where the current balance is deducted from the principal of your home loan at the time interest is calculated for that period. For example, you have been paying your $500,000 home loan at 3.00% p.a. for 5 years at $2,108 a month.

Calculations should be used as an indication only.

At the time of your next payment, your principal would be $444,531 and the amount paid in interest for that month would be $1,111. If you had an offset account with $50,000 savings in it, then that would be deducted from your principal for the purposes of calculating your interest. The principal would effectively be $394,531 and the interest payable would be about $986. This is a saving of $125 in that month. Or, if you maintain your payments, it can help pay down your principal faster.

Home loans with offset facilities usually have a higher rate of interest than basic home loans, but are especially useful if funds from difference sources are hitting the account: different salaries, investments, rents, a windfall etc.

Redraw Facility
The home loan allows for you to redraw from any extra funds you have paid in ahead of your repayment schedule. For example, if you are $30,000 ahead and want to renovate the bathroom for $20,000, then you can redraw those funds to fund the renovation. While you have not been earning interest on those savings, you have been saving on the interest you are paying on your home loan, which is usually higher than most saving accounts.

Redrawing can sometimes incur a fee, so speak with your bank about the options. For IMB customers redrawing using internet banking does not incur any fee. 

 

Repairing or streamlining your finances

There are good and bad times in every aspect of life and one’s finances are not exempt. At times of financial stress, you may need to make decisions which may not offer the best interest rate, but are essential for that period of life. Refinancing may help in a number of scenarios.

Consolidate your debts

Debt consolidation is a common reason to refinance. It is a possible solution when a borrower can pay their home loan repayments but is finding it difficult to keep on top of credit cards or personal and car loans that have higher rates of interest. Credit cards generally have a higher interest rate than home loans. Refinancing to include your debts will put all the payments into a single interest payment.

It is also worth qualifying that, although the rates of interest on home loans are usually lower than most other forms of finance, the time to repay the funds will be over the life of the home loan – up to 30 years. You may pay more over time.

If you fall into arrears

Falling into arrears on your home loan can be a serious situation that can ultimately result in you losing your home. The first step is to speak with your bank about adjusting your repayment schedule or applying for hardship assistance that suspends payments for a period, usually 3-6 months. At IMB, we will work as hard as we can to help you get back on your feet; if you are experiencing financial stress, please contact us. 

Refinancing to a different loan either with your current lender or, if they are unwilling, with another lender could reduce your payments and provide the opportunity to rebuild your finances. Interest rates may be higher, especially with some specialist hardship lenders. Once you are back on track, refinancing again may be a smart move.

 

Unlock Equity

Refinancing can be a way to use the equity in your home for other purposes, like holidays, a new car, renovation, an investment property or share portfolio.

What is Equity?

Equity is the portion of your home that you own outright, whether through paying down your mortgage or by your property’s increase in value over time. For example, if you bought your home for $500,000, and now had only $350,000 principal left on your mortgage, the equity would be $150,000. If the house had also increased in value to $700,000, then the equity would be $350,000.

However, lenders will usually only allow borrowers to access up to 80% of their equity value, minus the outstanding amount on their loan. So, 80% of your $700,000 is $540,000. Once you subtract the $350,000 you still owe, the available equity is $210,000. 

Calculating Equity

Calculations should be used as an indication only.

Remember, accessed equity is not free money. The unlocked equity will increase your repayments, so you will need to ensure that you have sufficient cash flow. It is vital that you speak with a professional accountant or financial advisor before accessing your equity. Depending on how you use the money, there are risks that you will be paying interest on further debt for no collateral gain, especially if it is used for holidays or shares which don’t yield the expected returns. Talk to an IMB home loan specialist to find out how refinancing your home loan can unlock your equity.

Go to when should I refinance to weigh up the best time to refinance your home loan.

 

_{Important Information:
The advice on this website has been prepared without taking account of your objectives, financial situation or needs. Before you act on this advice you should consider the appropriateness of this advice in regard to your objectives, financial situation and needs. Lending criteria, terms and conditions, fees and charges apply to IMB loan products. You should consider the relevant Terms and Conditions or Product Disclosure Statement before deciding whether to acquire any of the products shown on this website.}