Everyone wants to pay less interest on their home and investment property loans, and refinancing is one strategy to help lower your interest rates – but is it worth it? In this article we take a look at how you can get the most out of refinancing.
For owner occupied home loans, refinancing can be used to negotiate a better deal on your home loan and pay it off sooner. Depending on your situation, you should be able to save money by taking advantage of lower interest rates, or new products that weren’t available when you first negotiated your home loan.To help put it in perspective, let’s say you previously took out a $300,000 loan at 5% over 30 years with monthly repayments of $1,610. If you refinanced to a new loan at 3.24%, you could save ($306 per month) if you switched to the new minimum repayments of $1,304 per month, or pay your home loan off nine years earlier if you stayed with the same monthly payment.
However, for property investors, refinancing could mean increasing your overall limits to allow for future investments or renovations that will increase your total rental returns. It could also mean extending your interest only periods or extending the term of your loans to better improve your cashflow.
It’s important to make it work for you
Take advantage of your refinanced loan by:
- Consolidating debts: Home loan interest rates are often lower than those for other forms of credit, so you can save money by consolidating debts such as credit cards or personal loans into your mortgage. Beware, however: paying off a short-term loan over a longer period will likely incur extra interest and fees over the longer term. So instead, put the money saved from consolidating your debts back into your mortgage, as if you were still repaying the other debts, to reduce the overall debt faster.
- ‘Splitting’ your loan: Nominate a portion to be charged at a fixed rate of interest for a set period of time, with the remaining balance charged at a variable interest rate. When the fixed rate period ends, the loan reverts to the variable interest rate, giving you the flexibility to re-fix on a more competitive rate, or leave the total balance on a variable interest rate. You will benefit from both the security of the fixed rate and flexibility of a variable rate loan, and will be less impacted if interest rates suddenly rise.
- Having an offset account:The balance of your offset account is subtracted from the remaining principal amount before interest is applied, meaning you spend less on interest over the course of your loan.
- Making extra repayments: Any payments made on top of your regular repayment will save money by reducing the amount of interest you’ll pay.
Why is now the best time?
There are three key reasons why now is the idea time to consider refinancing.
Firstly the Reserve Bank of Australia (RBA) has reduced the cash rate two months in a row. However not all lenders have been equal in how they have applied the discounted rates. Some lenders passed on the full amount coupled with other incentives to win more market share. There are some amazingly attractive offers out there at the moment.
Secondly the Australian Prudential Regulatory Authority (APRA) has also given the green light to lenders regarding lowering their serviceability assessment rates. This is a massive game changer, as this will allow clients that have been unable to refinance loans due to serviceability requirements to once again have the ability to refinance.
The biggest section of the market this will affect are property investors who might have been forced to start paying principal and interest repayments. These clients will now be able to refinance their loans back onto interest only payments at much lower rates and potentially also extend their loan terms back to 30 years.
Lastly a large amount of lenders currently have refinance rebates in place to cover the cost of switching lenders. In some instances it can be as much as $2,000 per property. Which adds up if you have three to five investment properties.
If you would like one of the Trilogy Team to review your lending arrangements and see if there is better deal for you out there in light of these most recent changes. Please email me and I would be more that happy to review your circumstances.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).