Tuesday, 10 February 2015
Posted by Rebeccah Elley
To the delight of home owners (and the despair of savers) across Australia, the RBA dropped the official cash rate to 2.25%, at the first Tuesday board meeting of 2015.
While you’re probably thinking “Great, more money in my pocket when my provider follows suit”, if you’re smart about it, you could more than triple your rate cut by refinancing.
Let’s give you a scenario, using a $500,000 home loan over 25 years. Say your current home loan provider makes the full rate cut and drops your variable home loan from 5.25% to 5%, your monthly home loan repayments will be reduced by $73.
By comparison, if you switched to Mozo’s Mystery Bank offer at 4.34% (4.37% comparison rate), your monthly home loan repayments will be reduced by $262. Or to really put things in perspective that’s around $78,600 saved over the life of the loan!
Plus, you’ll get some much needed breathing room or you could put the saved money towards making extra repayments, helping you and your family be home loan free sooner. Win, win!
Mozo’s home loan expert Steve Jovcevski says now is a good time to refinance because lenders are aggressively pricing. “With rates at a record lows, it’s unlikely lenders will be making bigger discounts than what’s on offer now.”
So let a home loan comparison website do the hard work for you. Use Mozo’s switch and save calculator to see how much you could save by switching providers and then think of all the places you can park that extra cash - end of year holiday, home renovation... the list goes on.
Before you switch to the first low rate home loan you find, make sure you look at the new loan’s application and ongoing fees. For instance, Beyond Bank’s Special Rate Standard Variable Home Loan not only has a low 4.59% interest rate but also has no application or ongoing fees.
However, Steve warns there are plenty of other fees to watch out for when refinancing, including valuation fees and legal fees that are usually not disclosed in the comparison rate. “Ask the lender for all the upfront charges, including any government fees, which are usually between $300-$400. And also budget for the settlement fee that your current provider may charge you, which is generally around the $300 mark.”
Steve says before refinancing you should have a clear idea of how much equity you have in your property, by getting the new lender to undertake a valuation (costing around $220) or asking a local real estate agent to give you a free valuation.
If you find your property’s LVR (loan to value ratio) is more than 80% you will have to pay lender’s mortgage insurance. This may outweigh the savings made by switching home loans.
It’s common knowledge that the longer the life of your loan, the more interest you will pay. So make sure when you switch home loans that you will be paying it off over the same time frame.
And if you’re rolling personal loan or credit card debt onto your home loan, keep the repayment levels the same for the loans you consolidate because spreading the cost over the life of your home loan will end up costing you more in interest.
Another trap to avoid when looking for a new home loan is “honeymoon” rates that are competitive for a number of years but revert to a higher rate once the introductory period has come to an end.
If you do take up a “honeymoon” offer, put the date in your calendar and search Mozo’s home loan hub for a new home loan before the intro term ends.
If your current home loan has flexible features like an offset account, extra repayments and a redraw facility, make sure the new loan also offers these options to help you save on interest and pay off your home sooner.
While switching from a big bank to a smaller lender can mean massive savings on your home loan, Steve warns you’ll have to be prepared for less face to face and branch contact or none at all. “Overcome this by asking for one point of contact to look after your home loan file, as it makes the process a lot easier and saves you repeating who you are and what your situation is over and over.”
Happy with your current provider? Then you might not need to refinance, instead try renegotiating on your home loan interest rate. Steve recommends doing your research on Mozo first.
For instance, when Steve went undercover last year as a refinancer looking for a $500k home loan, he haggled a massive 1.16% off the standard variable rate loan, by doing some recon work and mentioning lower rates from other provider.