How do you determine if it's worth refinancing?

With interest rates so low at the moment, you might be considering refinancing your home loan. Chances are, if you bought your home more than a couple of years ago, you can make some big savings by refinancing to reduce your interest rate.

Even those who purchased more recently may be able to secure a marginally lower interest rate.

Refinancing can be greatly beneficial to many homeowners seeking out a home loan that suits their needs, but it’s not always the best option.

Is it worth refinancing for a 0.5% rate reduction?

A 0.5% interest rate reduction may seem insignificant and not worth the hassle of refinancing. However, if you plan on keeping your home loan for an extended period of time, even a small reduction like this can make a big difference.

Here’s an example:

If you took out a $400,000 home loan at an interest rate of 3.5% over a 25 year period, you would pay about $2,002 per month. Now, if you reduced that interest rate to 3%, you’d pay about $1,897. This would save you $1,260 per year, $6,300 over 5 years, or $31,500 over the course of the total 25 year loan repayment period.

That’s a significant saving if you’re thinking about the long-term benefit. However, the costs of refinancing could make the saving worthless so it’s a good idea to understand the costs involved before getting started.

Consider the cost

Refinancing often costs money, so it’s important to ensure that the benefits outweigh any potential costs.

Costs typically arise for those on home loans with a fixed interest rate. If you refinance your fixed rate loan before the fixed period is over, you could be charged break costs. Before refinancing, it’s best to speak to your lender to get an idea of how much you may be charged.

If the break costs are high and won’t be balanced or trumped by improved interest rate savings from refinancing, it might be better to wait until your fixed period concludes.

Some loan features cost money. For example, while beneficial for the right person, offset accounts may come with an annual fee. Similarly, you may be charged to take funds from your redraw facility.

Other costs can include:

• Property valuation costs
• Application and loan establishment fees
• Lenders Mortgage Insurance (LMI)
• Exit or discharge fees
• Mortgage discharge and registration fees

Related: How much does it cost to refinance?

Do I have to pay brokers?

The service mortgage brokers provide is free, so you don’t need to pay them anything. After the home loan is settled, the lender will pay the broker.

When you use an online home loan platform like Lendi, no costs will be passed onto you as the borrower.

• Related: Mortgage brokers vs. banks - Which is best?

Which bank should I choose?

There isn’t one bank or lender that will suit everyone’s circumstances. Lendi’s Home Loan Specialists work with you to find a lender that offers you a competitive interest rate and a home loan package that works for you.

It may be with a traditional, well-known bank or it could be with an up-and-coming online lender that suits your needs better.

Choose a time to chat with a Home Loan Specialist today to get your refinancing journey started.

Refinancing due to changes in your financial or life circumstances

Most home loan repayment terms are between 20 and 30 years. A lot can happen during this time, and it’s not unusual for you to experience changes in your life and income.

For many homeowners, the idea of having a home loan debt for so long is unappealing. If your income increases, you might consider refinancing in order to pay off your home loan faster.

Be cautious about reducing your loan term as you don’t want to bite off more than you can chew. When increasing your monthly repayments and reducing your loan term, take into account how this might impact your lifestyle and how you can afford to spend your money.

A home loan with a variable interest rate can offer increased flexibility in how you choose to repay your loan. You are able to make uncapped additional repayments, so if you receive a bonus or unexpected sum of money, you could put it towards your home loan.

Fixed rate home loans don’t always offer this flexibility, but you may still be able to make some extra repayments.

On the other hand, if your income has been negatively affected, you might look to reduce your monthly repayment amount. By doing this, you will extend your loan term and likely pay more in interest over time. Lendi's experts can help determine if this is the right move for you.

A marriage, divorce or growing family can also impact your ability to make repayments and it could make sense to refinance.

Worried about the stress of refinancing?

Lendi’s expert Home Loan Specialists take the pressure off you. Refinancing can be complex, but we are here to help make the process as easy as possible and answer any questions you may have.

Get in touch today to find out if refinancing is a good idea for you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.