Refinancing to lower my repayments

Refinancing to lower my repayments

Refinancing can give you a better deal. For many borrowers, their existing loan may no longer have a competitive rate or have the features needed to reduce interest charges.

Refinancing to lower your repayments is popular but you’ll need some help to make sure there’s no hidden costs and your new loan is structured properly.

How to lower your repayments by refinancing

The three most basic ways to lower your repayments are by either finding a lower interest rate, adjusting your repayment frequency or by using loan features that you’re old loan didn’t have.

Should I refinance my home loan to find a lower interest rate?

Finding a lower interest rate may not be too difficult but to make the switch worthwhile you’ll have to factor in the added costs of changing your home loan product.

A lender may have a much lower interest rate than your existing rate but a high fee to establish the loan, making it more costly to refinance with that lender.

Here are two examples:

Lisa’s current home loan balance is $300,000 and her variable interest rate is 5.25% and her monthly repayments are $1,797. Lisa found a different lender whose interest rate is 5.10%, and her loan repayments would drop to $1,771 a month. However her new lender charges a loan establishment fee of $1,000 and a monthly fee of $10. Using our loan comparison calculator, it would take her six years to save just $184.39. (25 year loan)

Phil has a home loan balance of $500,000 and a variable interest rate of 5.2% with a major bank. His monthly loan repayments are $2,952. Phil found a regional bank that is offering a variable interest rate of 4.80% but the loan has a $700 establishment fee. Phil’s repayments with the regional bank would be $2,864. Using our home loan comparison calculator, you can see Phil would save $698 in just one year with the new loan and would save $34,256 over the next 25 years.

Switching between fixed and variable interest rates?

Often, borrowers refinance between fixed and variable interest rates and it’s important to understand some key points.

Switching from a fixed to variable interest rate

  • You should begin comparing and searching for a new home loan about six months before your fixed rate expires.
  • It may not be worthwhile exiting a fixed interest rate before it’s term finishes as you may incur heavy fees.
  • Borrowers commonly switch to variable rates because they anticipate the average variable rate to be lower than the fixed rates presently offered.
  • Be prepared to see your monthly repayments fluctuate
  • You can split your loan between fixed and variable portions if you wish to lock in a portion of your repayments at a set amount.

Switching from a variable to fixed interest rate

  • Borrowers commonly switch to fixed interest rates because they believe interest rates are at the lower end of the rate cycle and variable rates will rise over the next few years.
  • You can split your loan between variable and fixed portions if you wish for a portion of your loan to have the additional product features that most variable rate products have.

Should I refinance my home loan to use additional product features?

If you have a basic loan without repayment options or additional features you may be able to find another loan that can save you thousands of dollars in interest.

Here are some of the main loan features that borrowers switch for:

Offset account

An offset account allows you to keep a sum of money in an account that counts against your loan balance but that you have instant access for. Offset accounts are great for those who have large savings they need to keep handy.

An example:

Ted has an existing home loan balance of $450,000 and he makes repayments of $2,630 a month (5%, 25 years). He has $50,000 in savings he wants to use to eventually use to start a business and his current loan won’t let him apply those savings to his loan balance. Ted finds a new lender with the same interest rate but that offers an offset account. Ted switches lenders and puts his $50,000 savings in an offset account. While the money is in his offset account, his repayments drop to $2,338.

Additional repayments

The ability to make additional repayments can help borrowers take advantage of periods where interest rates are low and to save thousands of dollars in interest.

Redraw facility ­

A redraw facility allows a borrower to claim back additional repayments they have made if they find themselves in a situation where they need quick cash.

Interest only repayments

Interest only repayments allow a borrower to reduce their monthly repayments to pay off only the interest portion of their loan. This strategy can be effective to manage cash flow but should only be considered with the guidance of a mortgage broker.

Should I refinance my home loan and change my repayment frequency?

A common strategy for saving money on interest is to adjust the number of times you make loan repayments per month.

Many loans do not offer options for paying a loan more than once per month so if you find a lender that allows you to make fortnightly or weekly loan payments, you could save thousands of dollars in interest charges.

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