Refinancing
Why would you refinance your home loan?
Refinancing has a few key benefits that can help you increase your monthly cashflow by reducing your home loan obligations. It can also be a great way to save on unnecessarily paying excessive interest to one bank. That money would look a whole lot better sitting in your account.
Are you being taken advantage of?
We’ve all had that friend haven’t we? You thought you were best friends only to find out they’ve been going to Sunday brunch with their “new” friend from work, enjoying those bottomless mimosas behind your back. How could they! I mean, after all those years, you’d think they’d have your best ‘interest’ at heart (no pun intended). Well, that’s pretty much how the banks operate. You’ve been a loyal customer to them for years, only to find out that they’ve been charging you more than their new customers. This is called ‘Loyalty tax’ and it’s a sad reality of the banking world. But it’s not all doom & gloom, there’s an easy fix. We recommend our clients to review their home loan needs, realistically, every 2-3 years to make sure that they benefit from that ‘new customer treatment' every once in a while.
Now, with the average lifespan of a mortgage sitting around 3 years before being taken to another bank, it seems like consumers have caught on. However, in saying that, you’d be surprised by the number of new clients that we help that have been with the same bank for 5 to 10 years. Only to find out they were charged 1-2% more than new customers, all while thinking that they were being looked after for being a ‘loyal customer’. That's a lot of money you could've spent on taking yourself out to brunch. Unfortunately, it seems loyalty isn't rewarded in the banking world today and customers need to put themselves first.
01.
Loan Term & Cashflow
The average loan term from any lender is normally 30 years with a few exceptions. If you've already been in your loan for a couple years, extending your new loan back to full term when refinancing can be a strategic way to reduce your minimum monthly repayments and improve your ongoing cashflow. If you're worried about paying more interest by extending your loan again, you are still able to make extra repayments to pay off your loan sooner (subject to certain loan features).
02.
P&I vs IO
Principal & Interest vs Interest Only repayments. Both having their own advantages, its important to figure out whats more suitable for your circumstance. P&I repayments go towards paying off your home loan as well as an interest portion, whereas with IO repayments, you only pay interest on the loan and your loan amount doesn't reduce. IO monthly repayments are generally lower than P&I repayments which can help in the interim to improve your monthly cashflow.
03.
Variable vs Fixed
Fixing your rate allows you to budget for the future as you'll know exactly what your repayments will be moving forward until the fixed period ends. However, you may end up paying more than necessary if the variable rate is lower. Of course, the fluctuation in variable rates is hard to predict so you'll need to take into account the amount of risk you are willing to take on at the time of applying for the loan. Keep in mind that you can come out of a fixed rate, but you'll be charged a break fee.
04.
Offset vs Redraw
An offset and a redraw facility both have very similar characteristics and essentially achieve the same result but with a few key differences. A redraw facility is the accumulation of any extra repayments you make to your home loan which reduces the loan amount that interest is calculated on. You'll need to apply to retrieve your redraw funds. An offset account is a separate account with easily accessible funds that offsets your home loan and interest is only calculated on the difference.
Things to consider when refinancing
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08 6230 3945
mail@dreamhouse.com.au
152 St Georges Terrace Perth WA 6000
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ABN 73 891 325 822
Credit Representative Number 552601 is authorised under Australian Credit Licence Number 389328