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.
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\n\nIt 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.
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\n\nRefinancing can be worthwhile for various reasons and even small changes in rate can have a profound impact on your pocket. Here are the top reason broke down:
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\n\nLower repayments
\n\tRepay loan sooner
\n\tProtect against rate increases
\n\tSimplify debt
\n\tTop up for something else
\n\tRenovate
\n\tRelease equity
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\n\nLower Repayments
\n\nFinding 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.
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\n\nOur 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 you rates above what they are offering new customers. Here’s what you can do.
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\n\nLowering 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.
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\n\nExtending 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.
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\n\nRepay Loan sooner
\n\nSmall 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….
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\n\nFor example
\n\nBy 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.
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\n\nBut 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.
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\n\nReinvesting interest saved from a lower rate as soon as possible could mean years off your mortgage.
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\n\nJust 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?
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\n\nProtect against rate increases
\n\nIf 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.
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\n\nInterest 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.
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\n\nFixed 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.
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\n\nUnless you think rates are on their way down, now might just be the time to beat the market.
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\n\nPro 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.
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