An interest rate cut always sparks discussions about whether a borrower should refinance their home loan.
There is a lot of commentary after the RBA lowers the cash rate on whether home loan providers will pass on the full rate cut and how you might be able to get a better deal elsewhere.
Whilst it is prudent to always know the interest rates on your home loan and that it is competitive to the market, the act of refinancing to continually chase a better rate can potentially be as damaging as it can be a benefit.
If by refinancing you can clearly identify the immediate and long-terms benefits, then you owe it to yourself and your family to do so. The important thing is to be able to identify the benefits.
One of the aspects of refinancing that tends to get over looked is the term of the loan. Let me explain.
If you borrow $300,000 over a 30-year term at 6%, then your monthly repayments will be approximately $1,789.70 per month.
By sticking to these repayments after three years your outstanding balance will be $288,252.
If you are then tempted to refinance at a rate of say 5.7% and refinance the $288,252 and your loan is be written over 30 years and the monthly repayment will be $1,673.02pm. This will provide you with a nice saving of $116.68 a month, which could be a short-term benefit.
However, on closer examination your home loan may now run 33 years. Let’s see how the short-term saving are reflected over time.
Original loan – $300,000
30 years at $1,789.70pm - $644,292
Refinance balance $288,252 loan after 3 years
3 years at $1,789.70pm - $64,429
30 years at $1,673.02pm - $602,287
By refinancing you could end up paying a further $22,424 over the life of the loan.
There are a couple of important points to note when you are looking to refinance, and don’t be afraid to ask your home loan manager some questions.
- What are the short term benefits and savings in refinancing?
- How will that impact your loan in the long term?
- Does the loan have to be written over 30 years?
- If you continue to make the same repayments as you are now with a lower interest rate what impact will that have on the term of the loan
There are some great home loan calculators you can play around with to allow you to obtain a greater insight into the short- and long-term benefits of refinancing
Here is a link to the intouch –Remaining Balance Calculator
Paul Ryan is the founder and CEO of intouch Finance and Property.