How to save over $12,000 in just three years
We'll show you the secrets to becoming financially free ahead of time
If you have had your home loan for a number of years, your situation has likely changed and your mortgage no longer suits your current needs.
The average home loan in Australia is refinanced every four to five years, but we recommend reviewing your home loan more regularly to make sure you're on track to achieve financial freedom as early as possible.
The decision to refinance should be carefully considered. At times it will make more financial sense to remain with the same lender and ask for a discounted rate, which is often the rate they advertise for new lending.
At other times, to save thousands in repayments and be debt free earlier in life, you will need to refinance to a new lender. The process of finding the right loan for your situation is complex, but we will show you how.
The average home loan in Australia is now over $530,000 and as you will see in the next graph, the average variable interest rate borrowers are being charged for an owner-occupier home loan is 3.10% per annum.
Interest rates are still at historically low levels, so a borrower with a home loan of $530,000 could save over $12,000 in just three years by switching to a new home loan.
How much can I save by refinancing?
When calculating how much you could save by refinancing your home loan, it's important to consider more than just the advertised interest rate. There are other fees and conditions behind the attractive rate that could have a huge impact on your finances and ability to build wealth through a property portfolio.
If you would like to know how much you could save by refinancing your home loan, just click the button below. By answering a short quiz, we can calculate your potential savings and let you know whether you qualify for any cashback offers.
There are many online comparison tools available that are handy for borrowers to complete their own searches. But for a more comprehensive review we suggest speaking to an expert who has access to hundreds of home loan options from a variety of lenders.
Finance is like playing a game of chess. To succeed, you need to have the right strategy and be able to make the right moves well in advance. A professional broker, will consider your future plans and implement a finance strategy that will help you achieve your goals as early as possible.
How do I refinance?
If you are looking to switch to a new product with the same lender, you can speak to your existing bank and they will begin the refinance process. Alternatively, there are many different websites that allow you to compare mortgage options and being submitting your application online.
The process of refinancing can be confusing and the wrong decision could lock you into a home loan for several years, ultimately costing you thousands of dollars. Take your time reviewing all the terms of the new loan, or speak to a mortgage broker who can do this for you.
A mortgage broker you trust will tailor a home loan to suit your needs and negotiate with the bank on your behalf for an even better deal. The entire process will be streamlined by a broker to remove the stress of switching banks.
Structure your loan to save more
Your home loan is probably the biggest financial commitment you will make in your lifetime. Combine an offset account with a low interest rate and you can reduce the amount your home loan will cost and also pay it off sooner.
What is an offset account?
An offset account is attached to your home loan and works the same way as a regular bank account. You will also be able to deposit your salary into this account and make withdrawals for everyday purchases using a debit card. Many homeowners have managed to save thousands in interest by incorporating an offset account as a professional package.
How does it work?
The balance in this account is "offset" against the balance of your home loan to reduce the amount of interest you pay to the bank. The more cash you hold in the offset account, the more you save on your home loan.
In the previous illustration, you will see that the borrower has a home loan balance of $400,000. But the borrower also has $50,000 in a 100% offset account linked to their home loan. This means they only need to pay interest on $350,000.
What are the benefits of an offset account?
Home owners and investors opt for a home loan with an offset account for various reasons. To learn more about offset accounts and how you could benefit, speak to a mortgage broker or click here.
Will I be better off financially if I refinance?
There are costs associated with refinancing and your broker will provide a list of costs that apply to your situation. The important thing is to compare how much you will save each month against how much it will cost to refinance. For example, if it will cost you $600 to refinance but your new loan will save you $150 per month, it will take four months to break even. If refinancing is a viable option for you, we recommend you begin preparing to switch banks by following these steps:
Have an idea of your home's value: Borrowing more than 80% of the property value could require lenders mortgage insurance (LMI). Even if you paid LMI when you purchased the property, you could be charged a second time. If you need to borrow more than 80%, you may benefit more from speaking to your current lender and negotiating a better interest rate.
Review your expenses: We recommend reviewing the last three months of your expenses to see what you could cut back on. As part of responsible lending, banks will address regular living expenses to see how a borrower manages their income and whether they will be able to comfortably manage the mortgage.
Lower credit card limits and pay off debts: As well as regular living expenses, banks will review existing debt and credit cards. Banks will see your credit card limit as a potential liability, so we recommend paying off any outstanding debt and reducing the limit of your credit card.
How refinancing can help build an investment portfolio
Using the equity in your home is a great way to build a property portfolio without dipping into your savings.
What is equity?
Equity is the difference between the market value of your home and the balance you owe on your mortgage. For example, if your home is worth $1,000,000 and there is $400,000 left owing on your mortgage, you have $600,000 in equity.
When we help clients purchase an investment property, we look at how much "usable equity" is available.
Banks aim to reduce their risk by only allowing you to borrow up to 80% of the home's value, without attracting Lenders Mortgage Insurance (LMI). Although there are some instances where you can borrow more than 80% of the property's value without paying LMI. Some professions receive exemptions due to their income and job security.
In the previous example, you may have $600,000 in equity, but the usable equity is only $400,000. How did we work that out? Well, 80% of the home's value is $800,000. Minus the amount owing on the mortgage and you are left with $400,000 to put towards the purchase of another property or properties.
What next?
Now you need to work out your borrowing power and finance strategy for your investment portfolio. That's where we can help. Click the button below and we will help you get started. You can also find out more ways to build wealth and pay off your home loan early, right here!
Now is the best time to find out how much you could save.
Whether you're a first home buyer or experienced investor, we can help you achieve your financial goals.
This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. The information has been prepared without considering your objectives, financial situation or needs. You should consider the appropriateness of the information and seek professional advice before acting.