If you’ve had your home loan for more than 3 years, new research suggests that you could be paying too much.
Today’s mortgage market is very competitive, so it makes good financial sense to review your home loan from time to time to see if you could be saving money and if your loan offers the flexibility you need [i].
Last year we showed you how we saved Cailyn big dollars on her home loan by switching to MOVE, however saving money on a lower interest rate is just one of the benefits to refinancing. In fact, by reviewing your home loan you have the opportunity to:
- Access new loan features
- Streamline your debt management
- Begin or expand your investment portfolio
- Achieve personal financial goals
So if you’re thinking it’s time to give your home loan (and your finances) a health check, be sure to check out the nine most common refinancing questions asked by our members.
1. What do I look for if I am trying to save money on my home loan?
There are a number of things to look for in a home loan if your primary objective is to save money.
Firstly, look further than the interest rate. If you compare lenders based on the advertised interest rate, you are not taking into account any fees and charges that the loan may carry. Instead, look at the comparison rate. As the name suggests, a comparison rate is a tool to help you identify the true cost of a loan. It is a rate that includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure.
Secondly, your home loan should offer an offset account. A mortgage offset is a transactional or savings account which is linked to your home loan. The money that you put in this account will reduce the amount of interest payable on your mortgage. For example: If you have a $260,000 home loan with $10,000 in your offset account, you will only be charged interest against $250,000. By building up your savings in your offset account, you can cut years and thousands of dollars off your home loan and is an important feature to have if you are looking at saving money on your home loan.
2. What home loan features should I look out for?
When shopping around for a home loan, be sure to check out and compare the features each home loan offers.
- Do they offer an offset facility?
- Do they allow you to make extra repayments?
- Do they allow you to make unlimited redraws?
- Do they charge any ongoing fees or early payout fees?
Every lender is different, so it’s important to make sure you’re aware of all the features and possible restrictions on each home loan you’re comparing. It is an Australian Government requirement for all financial institutions to make a Home Loan Key Fact Sheet available for every mortgage product that they offer. This is a true ‘non bias’ look at the facts of the loan product you are considering. This information should be available on the lender’s website which can make comparing products easier for you.
3. What does equity mean?
Home equity is money that you can use to build your wealth. In essence, equity is the difference between your home’s value and the amount owing on your mortgage. For example, if your home is worth $550,000 and you have $325,000 owing on your home loan, the equity you can access is $225,000. You can use this equity to invest in other areas such as home renovations, a new car, shares or investment property.
4. Can I borrow more than what I have owing on my current loan?
Yes! However you will need to consider how much you can borrow first. In a nutshell, your borrowing capacity is determined by your income minus your financial commitments. Your financial commitments include items such as your living expenses, credit cards, car loans or any interest free arrangements. If you would like an estimate on how much you could borrow, check out our Borrowing Power Calculator.
5. How can refinancing help me buy an investment property?
If you’ve been paying off your mortgage consistently over the past few years, you may be able to use the equity in your existing property to secure an investment property. Ideally you should have 20 per cent of the investment property’s value as a deposit. If this option appeals to you, be sure to check out our beginners guide to buying an investment property to see how you can get started.
6. Can I get rid of my credit card debt when I refinance my home loan?
The simple answer- yes, yes you can! Credit card and even personal loan debt is notorious for having a high interest rate. If you’re looking to refinance your home loan, why not use the opportunity to review your total financial situation? It means that you’ve only got one loan to pay and could mean big savings for you.
When considering your options, it is important to look at the potential disadvantages involved. Remember that your mortgage is a long term debt, whereas a credit card is usually a short term debt. This could mean that you are paying more interest in the long term. However, by making extra repayments on your home loan you can ensure you’re making the most of your debt consolidation. Use our budget caluclator to see where you might be able to free up cash in your budget for extra mortgage repayments.
7. Can refinancing help me renovate my property?
If you’ve been planning on renovating your property, why not consider adding the cost of the renovation on to the amount of your home loan refinance? Not only will you be acquiring a home loan that better suits your needs, but you’ll get the chance to complete those renovations you’ve been putting off.
8. Fixed or variable?
A fixed rate home loan means that you lock in an interest rate for a set period of time (usually 1, 3 or 5 years). At the end of the fixed rate term, the loan will usually change to the standard variable rate offered by the lender. While fixed rate home loans ensure that fluctuating interest rate rises do not affect you, this also means that rate drops won’t apply to you. Fixed rate home loans can also restrict features such as redraw facilities, extra repayments and break fees often apply.
If you decide not to fix your home loan, your interest rate will move with the changes in market interest rates. This means that your interest rate could rise and fall over the life of your loan, which may affect your repayments. Variable rate home loans are generally more flexible with your repayments, redraw facilities and offset options.
If you’re still unsure about which interest option is best for you, we recommend getting in touch with your lending specialist.
9. Will it cost me to refinance my home loan?
In short, yes. However the long term rewards often outweigh the initial investment.
Here are the potential costs you’ll need to consider
- Break fees: If you are opting out of your existing fixed rate loan contact, there are likely going to be fees associated. You should consider these and weigh them against the long term savings of refinancing.
- Valuation fees: When you refinance, you may need to have your property professionally valued in order to to ensure that there is sufficient security over the amount being lent. In Australia valuation fees generally cost $300-600 depending on where you live.
- Establishment & ongoing fees: Be sure to check out any establishment, and ongoing fees to your new loan. The interest rate savings will generally outweigh the costs of refinancing the loan.
Want to take advantage of MOVE’s award-winning home loan products?
Why not check out what we have to offer or contact your personal MOVE lending specialist on 1300 362 216.
This blog post is for general information purposes only and is not intended as financial or professional advice. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product or other professional advice. You should seek your own independent financial, legal and taxation advice before making any decision about any action in relation to the material in this article.
Railways Credit Union trading as MOVE ABN 91 087 651 090. AFSL/ Australian Credit License number 234 536 | ABN 91 087 651 090