Hey, YouTubers. Jayden here. So today, we're going to go through seven reasons
to refinance your home loan in 2018. If you've got a home loan, you're probably getting
bombarded at the moment from your next neighbor to the 7 o'clock news to probably
the local Uber driver, all talking about interest rates going up and refinancing.
But is now a good time to refinance?
There are few different situations where the refinancing of your loan could make sense
for you, so let's go over a few of the main reasons for you to refinance in 2018.
First off, what is refinancing? Refinancing your home loan basically means
change your existing loan for a new one and in most cases, a new bank.
Two main reasons people have to refinance their loans are A, to reduce their loan repayments
or get a cheaper rate or B, basically increase their existing lending.
You can refinance your home loan from any bank that you choose and it doesn't necessarily need to
use an existing lender. These days, banks don't reward loyalty
and in most cases, we find lenders offer better deals to new customers, rather than rewarding existing ones.
So what are some reasons to refinance your home loan in 2018?
Reason #1, I want to reduce my home loan repayments. If interest rates have changed since you've got
your original home loan, you could be able to refinance into a new loan with the lower rate.
By refinancing your loan, you can also reduce the amount of interest you pay,
reducing the monthly repayment, meaning you pay less over the life of the loan.
At Hunter Galloway we find in most cases, if you've had your home loan for over two years,
you're probably on a fairly uncompetitive rate. Let's say you're currently have $500,000
with an interest rate of 4.5% and your current monthly repayment is $2533 per month.
So if you looked at switching your loan to a cheaper rate say, something that's from
the market at the moment paying about 3.75%, you could potentially save a bucket
but we'll get to that in a sec.
First of all, by reducing your home loan and rate to 3.75% from 4.5%, your repayments are
reduced by $218 per month, so you're saving $218 per month just by refinancing your rate.
Pretty crazy. That's not the best thing of all.
The best part is the power of compounding interest. So you've got to remember you've got a home loan
over 30 years and although, going from 4.5% to 3.75% might not sound like a lot.
Over 30 years, you would be saving over $78,000 in interest
like you can see here from the asset calculator.
$78,000? Man, it's crazy. The power of compounding interest.
Reason #2, my property is increased in value. Broadly speaking, property price in Australia
have increased over the last five to seven years. If your property's gotten a bit of a boost,
you might be able to refinance and get a better deal. These days, bank gives better interest rates to
borrowers who have more equity. So you know, using the same example before,
if you bought your home for $500,000 and had a loan of $450,000 that means you had
10% equity when you bought the property. But if since you bought that property say,
four or five years ago, the property's value has increased from $500,000 to now be $600,000.
It means your equity has increased to $150,000. So it's gone from 10% equity to 25% equity.
The benefit of this is that these days, banks are willing to give bigger discounts
for when people have large amounts of equity, so it means today that you could have-
you'll be eligible for a much higher discounted rate and be able to reduce your loan repayments,
helping you pay off your loan much quicker.
Reason #3, my fixed rate period is expiring. In Australia, it's super common for people to have
a fixed rate between one to five years. When the fixed rate term ends at
that one to five year period, it generally rolls back to a variable rate and in a lot of cases,
the banks will roll this back to the standard variable rate without a discount.
That means you can be paying tens of thousands of dollars extra on your loan because you're paying
this on the variable rate without a discount.
Now, the way to fix this and the way to avoid this is either looking at switching your rate again,
it's actually checking that you're on a discounted variable rate or looking to refinance
and save a chunk of money.
Reason #4, I can afford to pay more on my loan per month.
For some people, reducing the length of the loan term can help you pay off your loan quicker.
So if you can afford higher monthly repayments because you had an increase in income,
because you might have gotten a bonus or you know, whatever reason, you could potentially refinance
your loan and get a shorter term to help pay it off way quicker.
In this case, you could look at reducing your loan term from 30 years to 25 years,
helping you to pay off the loan faster, saving you literally tens of thousands of dollars
in interest payments over the life of the loan.
So let's go back to the example from before. Let's say you've got a loan of $500,000
and you're currently paying 4.5% interest rate. If you were to refinance that loan to a lower
interest rate of 3.75%, you'd obviously save $70,000 and your repayments would be
$218 per month less but if you were to keep your payments the same as they were when you're paying
4.5% per month, so if they're still the $2500 per month in payments, you would actually be paying more
because your interest rate is lower and you would save $133,000 in interest over the life of the loan
by making those extra repayments and having a lower interest rate.
$130,000? It's crazy and you basically save you know, $400 a month equivalent payoff over the life of the loan.
But the kicker is because you're paying this loan so much quicker, you're literally cutting off gears
from your home loan so in this case, you would have to pay off your home loan
52 months earlier or four years. You cut four years off your home loan by refinancing?
It's crazy. Just check your statement, please. Please?
Reason #5, I want to increase my loan and cash out. Now, I'm not talking about cash out like at the casino.
A cash out refinance allows you to use equity from your home to borrow money at a lower cost.
You might want to use these funds, not for the casino but to invest in shares, use it as a deposit
in a new investment property, for a bunch of things obviously to make one.
But how exactly does increasing in your loan work? Well, let's use the example above again.
So let's say that you bought your home for originally $500,000 with the $450,000 loan.
Since then, your home might have increased in value to $600,000 but you've still got
the $450,000 in loans. That means, your net equity in that property is
the 600 minus 450 equals $150,000. Whew! Hold on. Don't get too excited yet.
The bank's obviously only lend up to 80% on the loan amount so what you need to do is
then go $600,000 at 80% equals $480,000 minus $450k, which leaves you with $30,000 in equity
you can withdraw from the property to do other stuff.
Now you can potentially borrow above the 80% or $480,000 by using lenders mortgage insurance
but this amount can range from a few hundred dollars to a few thousand dollars, so it's worth having
a chat to your mortgage broker to make sure that you're not going to pay too much in
lenders mortgage insurance just to pull a bit more equity out of the property.
Number 6, I want to do some renovations.
So you might have bought the property five years ago for $500,000.
The kitchen might be looking a little bit tired. You might be ready to do some renovations
and you may be thinking, instead of using cash out of your own pocket, you can use the equity in your home.
Redraw, not a bad idea but how do you do that? Well, let's start with the two categories
that renovations generally fall under.
One you have simple or cosmetic renovations and two, you have structural
or more complicated renovations. Let's start the simple renovations.
Simple or cosmetic renovations are exactly that. They're basic stuff that you know, involved say,
painting a wall, set an air conditioning unit or maybe some solar panels on the roof.
It's stuff that you can get a quote and get done tomorrow and these
type of renovations works exactly the same way as the cash out and equity that we talked about in
the example earlier, where you're just relying on the current value of your property,
you're increasing the loan, you get that $30,000 out and potentially use that to go and paint the walls
and make the place look really nice.,
Now, structural renovations are where it gets a little bit more complicated
but still super achievable. Structural renovations are generally
when you're adding more values to the house. So it's stuff that you need to get
a builder involved with. You know, if you're adding say, a bedroom,
if you've extended the kitchen, if you're putting a huge patio thing or building under the house.
It's big- you know, a big scope of work.
Now generally, the structural renovations, you'll be adding value to the house,
therefore you'll be increasing the value of the house.
So you can actually get what's called an as-if complete valuation.
So again, let's say your house was worth $600,000 and then, let's say that the works were about
$100,000 and they'll going to add $100,000 of value to your home.
So now at your property on completion would be worth $700,000.
The bank would then use that $700,000 to lend against. So they'll do $700,000 at 80%,
which gives $560,000 in lending. It means you could actually increase your loan
from $450,000 to $560,000. You have $110,000 to do your renovations.
Whew! Best use of your money. Great.
Now, our last one, Number 7 is I want to consolidate some debt.
You know, put some personal loans and some credit cards, stick it on the home.
Now, this is one you've got to be a bit cautious off but let's start off with what it is.
Consolidating debt is basically that. It's putting or it's grouping together your use
in credit cards, personal loans, HECS it, maybe. You probably shouldn't do that.
It's more for things that would have high interest rates that you want to obviously, lower the interest rate,
put on a home loan rate and potentially make your monthly repayments a bit more manageable
because on those high interest rate loans, you can be paying big amounts per month.
Now a debt consolidation works in a similar way to cash out refinance, where the increased
portion of the loan is you know, where the property is valued at current- today's value, you pull out
that increased equity so in the example earlier, you have $30,000 to pull out and then you'd use
that to pay out your personal loans, your credit cards, your car loans and that sort of stuff.
Now, like I said earlier, debt consolidation works well if you're paying 20% or 30% on this car loan
and you want to get those costs down a little bit but where people can get trapped is not realizing
that by putting on your home loan, you're potentially changing it from say,
a five-year personal loan that it's going to be gone and paid off for five years to putting on the home
that could take you 30 years to repay. So the cost can actually end up being more.
So you just need to make sure your mortgage broker does the numbers on this and does a like-for-like
comparison to make sure you're not carrying those costs or those personal loans
or that holiday you had a couple of years ago you know, on the home for a couple of years
for 30 years because that could cost you tens of thousands of dollars.
So what do you think? Is refinancing right for you? Well, whether there's heaps of benefits to refinancing,
you just need to remember that there are some costs to do this.
There's application fees, there's government fees, there's sometimes exit fees and these can range
from say $500 to $600 but like you can see in the example earlier, you know,
paying $600 to save $70,000 to $80,000 is a worthwhile deal.
Now with that being said, there is some good news out there.
At the moment, there are a bunch of banks giving refinance rebates, so what that means is
by switching to that bank, they'll give you between $1000, $1500 and up to $2000 to refinance
your home loan and cover the cost of that move.
So that's great to be able to do that and there are some terms and conditions as minimum
loan amounts of say $250,000, you need to be able to moving from an external bank to that bank.
There's a couple of you know, general terms conditions. Talk to your mortgage broker or drop us a line
and I'm happy to help you out on that.
So what did you think about that? What was your favorite point?
What's you know, your whole reason to refinance or what would you think about?
Would you consolidate debt? You think it's a good or a bad idea,
leave a comment below. We'd love to hear from you
and if you got any questions, get in touch. Thanks, guys.