So we're going to look at the benefits of refinancing and especially
around consolidating other debts. So what we've got in front of us is a
refinance summary spreadsheet. So in this case, we've got a $500,000 loan
that's expiring September next year. Let's just change that to this year.
Simple, flattens a bit. So it's coming out soon. Current interest rate is
relatively good, 4.49 annual interest costs. So what does it look like if you
would refinance this $500,000 loan from one bank to another? So it says
there's a small break fee because the rate is already relatively low. You'd be
thinking, you know, "Why am I going to do this?" Well, one of the major reasons is
we're going to lock in this low interest now. So this is a, you know,
not a bad one-year rate. And you want to get $350,000 in cashback.
So this cashback is an incentive for joining a new bank, and it's added
to your bank account when you join this new bank. So what does this look like?
So the difference in your interest expense in that period to September 2018,
you pay $585 less interest to the bank. Over that period, you get $350,000
into your bank account that's less the break fees, less the legal fee.
So the benefit of refinancing right now, even though you still got a loan ongoing,
is $2,885. So that's pretty good. What I would also like to show you is
another example. This is a client that I've been working with this week.
He is refinancing from Kiwibank to another bank. So his loans are as follows.
He's got some coming out May next year, some that's just come off fully fixed now.
And this is his floating. So we just work out the floating rate
on one year. So his current floating rate is 5.85. He could get that down to 5.25.
He just has to know how to ask. And so he can take his current rates,
putting them all on that 4.19, I think he's actually getting a better
rate than that. Less his break fees, relatively small break fees because,
you know, Kiwibank is not charging big break fee on these lines.
So what do the numbers look like? On top of consolidating his $20 grand
credit card debt into his mortgage, and I'll explain that in second,
he is going to get $5,200 cashback. His interest savings between now and that
period of…if he didn't refinance in...between refinancing and not,
because he's getting these lower rates, he's going to save $4,681 in interest
expense in that period between now and May 19. Less his legal fee of $900.
He's going to save $8,385 by refinancing now. And I want to show you the difference
between consolidating debts and not. So he has a credit card around $20,000.
He's paying more than 17% interest on that at the moment because he hasn't
kept up with that. And this is pretty common, you know? There's a lot of people
with cue cards, you know, Visa, you know, whole bunch of credit cards
from different banks, and consolidating to the mortgage is pretty common.
So his annual interest expense for that credit card if he doesn't sort it
out is $3,400, he can get that down where it's going to cost him much less.
So this potential cost per annum is going to be less than $900. So you can see,
it's a big difference between paying 17% and putting it on the mortgage.
So if we took that credit card debt out, he's still saving $5,800 by refinancing.
But because that credit card is in there, he's saving a lot. And what this means is
he can manage his monthly repayments, you know, pay the debts off a lot faster
because the interest rates are lower. And he can, you know,
almost have like a reset button. So he's feeling a lot more comfortable
about things. And this cashback really does help. So another example of a
refinance where somebody is actually, in this case, going from really low rates
to slightly higher rates. But because their mortgage is so big,
their total lending in this instance is, you know, over $1.8 million,
the cashback is going to be $10,000 or more. There's no break fees.
And even though they have to pay a legal fee across two properties
of around about $2,000, they're going to save over $6,700
in refinancing. They're going to be able to separate securities,
they're going to be able to restructure or set new terms on the mortgages if they'd
like, and there's a bunch of other reasons why somebody might refinance
from lower rates onto higher rates. But you can see, it's counted to your
normal thought of why you would go from 4.25 for two years to 4.3,
but it's because of this cashback. Cashback is such a strong motivator.
It's money in your bank account, the day, you know, the week that you switch.
And if in this example, let's say, which is again pretty common, there was
$30 grand of credit card debt on, you know, 18%.
Now, we're going to refinance it.
You can see that the total savings goes up over $10,000, you know?
So they've gone from less than $7,000 to over almost $11,000 of savings
by consolidating their credit card debt. And people will complain, "Hey,
now you're paying your credit card of over 30 years instead of one,"
but a lot of people aren't going to catch back up on that credit card debt.
And you can actually, if you're more disciplined,
pay the debt off a lot faster by having a lower interest rate.
There's no reason why, in this case, this client can't make lump sums
each year, they're paying less towards their interest repayments,
they can build up a little bit of a revolving credit or offset account,
and they actually pay the debt off a lot faster because interest rates are lower.
So make sure you're talking with somebody that knows what they're doing in terms
of consolidating debts, that you're not just taking one credit card debt
and putting it into another credit card where you might as well just get
locking some low rates and focus on the whole debt
rather than just a little amount of it.