How to save money immediately by refinancing your home.
With money on our minds in the current economic climate, we’re all looking for ways to save. As a homeowner, no doubt your mortgage is your most significant expense and when you started on your mortgage journey you might have a low-interest rate, but as time has passed, your home loan might not be giving you the best financial outcomes you would have projected.
Refinancing seems scary but it can save you a considerable amount of money every month and set you up for a better financial future. So today we want to take you through how refinancing actually saves you money and if you’re best suited to the following strategies.
How refinancing will save you money
There are several ways that refinancing can save you money in the long run. And not just in straightforward ways such as a decreased interest rate. We’ll take you through each of the key ways you can start saving money all with the right strategic advice to make the switch:
Reduction in interest rate
Refinancing to a lower interest rate will not only mean you pay less interest over the lifetime of the loan but also, you’ll see a decrease
in your monthly payment amount. This will immediately impact your monthly outgoings and potentially save you thousands of dollars over the
full lifetime of the loan.
Switching your rate type
Depending on the best deal your lender had on offer at the time, you might have initiated your loan on a fixed or variable rate.
If you started on fixed and it is soon to be renewed, you’ll likely be placed automatically onto their current variable rate. Check if your providers' variable rate is competitive in the current market. If not, it might be wise to switch to another provider who can offer a variable rate that is in line with current rates. Often providers will offer favourable rates to encourage you to make the switch. Variable rates allow a level of flexibility in terms of repayments, moving with current trends to provide the best rate at the time.
Alternatively, you might currently be on a variable rate but are seeing a trend for rises. In this case, it might be the best option to opt for a fixed rate which maintains a low-interest rate and will protect you from any unforeseen rises. Again, ensure that the provider is giving you a competitive rate and that the term for the fixed rate will hold you over until economic stability resumes.
The final option would be to go with a split mortgage which lets you divide your home loan between both a fixed and variable rate. This allows you the security of a fixed rate with the flexibility of a variable rate. Not all providers offer this though, so be sure to speak to your Mortgage Advisor to find the best solution for you.
Consolidation of debt
If you’re currently paying off several types of debt, you’re likely paying a lot of different interest rates and making several different repayments. Consolidating your debts into one new home loan can ensure that you’re not suffering from loss from variable interest rates across different providers and make it easier to make repayments.
Something to note however, debt consolidation will increase the TIME and therefore can increase the amount you’re paying over that time. What’s key to this strategy is making additional repayments when you can, cancelling credit cards and avoiding debt in the future. If you move forward with these three in mind.
Using an offset account
So, what is an offset account? Essentially, it’s a transaction or savings account linked to your home loan. The additional account reduces the total balance left on your home loan - potentially decreasing the amount of interest you’re paying over the lifetime of your loan. Whilst it won’t reduce your monthly payments, offsetting can reduce the total amount of interest and give you the ability to pay your loan off sooner.
Making additional repayments when you can
Finally, making additional repayments. Bonuses, a pay rise, inheritance - sometimes we run into more money than we expected. These are great times to up the ante on your repayments if you’re in a variable loan. Most fixed-rate mortgages do not allow additional repayments as they offer the set interest rate for the pre-agreed repayment amount. However, making repayments when interest is low on a variable rate can look to save you thousands on your overall interest paid.
Is refinancing right for you?
The first thing to consider is your financial situation. Initially, it may cost money but, if handled correctly and the correct strategy and advice are applied, it will offer long-term benefits and savings for you. And therefore, we advise our clients that, more than likely, you must be in a positive financial position before making the switch.
There are also some other stipulations to look out for that should warn you off from refinancing. Here are some reasons we’d advise AGAINST refinancing:
The new interest rate you’re switching to is also not competitive - this could end up costing you more over the lifetime of the
- If you’re nearing the end of your loan. The time, effort and money it takes to move might not be worth it if you’re within a few years of paying it off.
- If you’re planning on moving or selling. Again, if you’re looking to change things up before breaking even refinancing will cost you more than the savings you’ll make.
- If your current loan has higher break costs that doesn't equate to the savings, you’ll make over the time you refinance.
- When you currently have an existing equity loan where permission is needed to switch.
We understand that more than anyone, a refinancing journey, and all of the above can still be a challenging journey, and so in these circumstances, now more than ever, it is important to obtain unbiased, calculated and strategic advice that works in your best interest as the customer.
If you’re looking for some strategic advice on the best money-saving route for you - get in touch with our Mortgage Advice Team for a complimentary 15-minute Discovery call to see if and how we can assist you.