IS IT WORTH BREAKING A FIXED RATE HOME LOAN TO REFINANCE FOR A LOWER INTEREST RATE?

Many people are asking us this exact question these days. With interest rates at an all-time low, and household expenses at an all-time high, refinancing to a lower interest rate looks like a great way to save on your monthly budget and it absolutely can be. But you do need to weigh up the costs of moving to a better interest rate. If you can get a better interest rate with your current lender, that is fantastic. But if you need to move to a new lender to get the lower rates then you need to look at the costs involved.

Type of costs involved in refinancing

There are a few different fee types that you may have to pay when refinancing. The main one is a Break Fee. This is generally charged by Lenders when you are still within your fixed rate period. First step is to find out what that Break Fee (or Exit Cost) would be for you. Contact your current lender and ask for a letter outlining what the Break Fee will be if you pay out your loan today.

Other fees that you may have to pay include:

• Discharge fees: Paid to your current home loan lender to pay out your existing loan in full and prepare required documentation.
• Application fees: The fees that the new lender may charge you for the new loan.
• Valuation fees: The new lender may charge a valuation fee to value your property that will be the security for your new loan.
• Land registration fees: These are the government fees to remove the existing mortgage from your current lender and register a new mortgage to your new lender.
• Lenders Mortgage Insurance (LMI): This is only charged if you have less than 20% equity in your property, your new Lender will require you pay LMI to protect them, in case you default on your mortgage.
• Ongoing fees: There are a myriad of different ongoing fees for home loans.

It can be difficult to work out all the different fees involved unless you do some detailed research. Until you go through the application process with each Lender, it’s also difficult to work out which Lender is going to be most likely to approve your loan. That is where we come in.

Don’t stress too much about all the different fees though, just find out what your Break Fee will be, and we can work out the rest for you.

Example calculations for refinancing

Loan balance: $500,000

Current interest rate: 3.8% p.a.

Loan taken out 2 years ago on a 30 year loan term.

Current monthly repayment $2,330.

Fixed rate term was 3 years.

Lender quoted Break Fee: $1,500

Refinanced to a new Fixed Rate Home Loan rate of 2.29% p.a.

New monthly repayment $2,017.

Savings per month $313

Savings per year $3,756

Costs to refinance $1,000 (discharge and other fees) + Break Fee $1,500

Savings in first year $1,256

Savings over the next five years $6,280!

This is looking well worth making a move.

Some lenders offer a refinance rebate!

Now, on top of this, there are select lenders that offer a refinance rebate – generally between $1,500 – $4,000. This can almost double the benefit of refinancing and make the costs negligible.

To work it out yourself

But if you find it confusing, or don’t have time…. skip this section!

Find out:

1. What interest rate are you currently paying? The rate should be on your latest Statement, or contact your Lender if you are unsure.
2. What rate will your loan go up to once the fixed period is complete?
3. What are your monthly repayments?
4. How much do you currently owe on your home loan, and
5. How many years are left on your home loan in total?

Plug these figures into our mortgage repayments calculator and calculate how much interest you will pay over the next five years.

Now do the same with say 3.0% p.a. interest and 2.5% p.a. interest. What would your monthly repayments be? How much could you save per month and how much would you save in interest over the next five years?

Is it worth breaking your fixed period right now?

Even if you save $150 per month, that is an extra $1,800 off your loan each year. Well worth considering!

The national average of savings derived from refinancing in recent years, was around $260 per month. https://homesales.com.au/news/latest/how-many-aussies-refinance-home-loan/

This represents $3,120 per year. Over a twenty-five year mortgage, $77,700 would be saved.

Leveraging your refinance savings

If you chose to invest refinance savings back into your mortgage, i.e. refinance to a new Lender but continue paying what you are currently paying, you can pay your mortgage off sooner and put a serious dent in the interest you pay over the life of the loan. If you chose to invest your savings to renovate your home, with advice from a professional in the field, such as a real estate agent, you may be able to increase the value of your property and sell it at a higher price or set yourself up for the next step of re-investing using the equity you’ve built. More savings and greater financial freedom! Or of course, you could spend your savings on things you really need now – like a holiday or some joy bringing gifts and activities.

Let us do the calculations and find a suitable lender

It’s not easy to compare the different fees and Lender requirements yourself, unless you have a lot of time on your hands and a bit of experience dealing with financial institutions. We have access to over 40 Lenders and we know their policies and document requirements. Once we understand your situation, we can identify a lender for you that is most likely to be successful. We only put through applications that we know are highly likely to be successful. We’ve also got all the fee structures for each Lender at the push of a button. So don’t waste your time – come and chat to us and we will present you with all your options and how much you could be saving on your mortgage.

Book a FREE MORTGAGE SAVINGS PLANNING SESSION today.