Quite simply, many people refinance their home loan to access lower mortgage refinance rates. The reasons for doing so are clear: the lower your mortgage rate, the more you’re likely to save on your home loan overall. It’s important to understand how much you can truly save by doing this, which is demonstrated in the example below using our home loan repayment calculator:
James is currently paying off his home loan and has an outstanding debt of $500,000 with 25 years left to run. If he stuck with his current home loan, which has an interest rate of 2.5% p.a., he’d pay a total of $172,925 in interest alone (based on monthly repayments).
However, James is considering refinancing his loan to one with another lender which boasts a 2% p.a. interest rate. If he were to refinance his loan and move to a mortgage with this new lender, he’d only pay $135,782. This means he’d save more than $37,000 over the remainder of his loan by switching to another with just a 0.5% p.a. saving.
Of course, there’s a variety of other reasons why someone might wish to refinance their mortgage. You may lean towards one of these or a combination of multiple. These include:
Reducing your loan’s fees
It’s not just about interest rates when it comes to saving money, as cutting down on the fees charged on your loan can also make a big difference. These may come in the form of ongoing or annual fees, which can add up over the life of your loan. For instance, switching your home loan from one which charges a monthly fee of $15 to one with a $5 charge can save you $3,000 in itself over 25 years.
Accessing home equity
If you’ve been paying down your loan for some time and have established some home equity, you might wish to refinance your loan to access some of it. This equity can be added to your loan for a variety of reasons, such as helping you conduct renovations, consolidating existing debts, freeing up cash to use as a deposit for an investment property or simply to help with urgent expenses.
Changing your home loan term
You can benefit a considerable amount from shortening your home loan term, which is achievable with a home loan refinance. For instance, you’d pay $172,925 in interest over the final $500,000 and 25 years of your home loan. However, while shortening your term by five years would increase your monthly repayments by over $400, it would also reduce your interest bill by well over $35,000 without changing its rate.
Adding features to your loan
Additionally, you might want to refinance to gain access to further features on your home loan to allow you to save money. A popular home loan feature is a mortgage offset account, which enables you to deposit additional funds into an attached account to reduce your loan principal and the interest payable on it. For example, a $400,000 loan debt with $30,000 stored in an offset account would only have interest payable on $370,000 of it.