How to save thousands in the new year by reviewing your debts this festive season

Compared to just a few years ago, Australian home loan borrowers today are benefitting from historically low interest rates. And borrowers who have taken a mortgage in the last two to five years should be looking to save money on their biggest debt.

Why wouldn’t the promise of lower payments and chance to save thousands of dollars over the life of one’s mortgage entice anyone to at least research it, right?

Yet independent reports by Australian Productivity Commission and the ACCC show that on average, Australian homeowners passed up more than $5,000 in potential savings annually because they failed to refinance their mortgages to a new lender when they should have.

If you have a mortgage, take the first step towards improving your financial situation by reviewing your biggest debt. Use these tips for the best ways to save money when you refinance your home loan and you’ll be scooping up those savings in no time.

1. Consider the Term 

Before you start talking rates, consider what you’re trying to accomplish. Is your goal to save on your monthly payment? Do you want to pay off your mortgage by a certain timeframe?

The difference between refinancing the residual term of your existing loan and extending back to a 30-year term will impact the interest saved, how quickly you pay it off, and the monthly payment amount.

The shorter the loan term, the higher the payment and the faster you will pay off the loan. You can save on total interest costs with shorter term equalling the remaining term of your existing loan.

On the other hand, if you’re simply looking to reduce your monthly payment, you could stick with a 30-year term and then actively make additional repayments to bring the loan term down based on your financial situation.

Of course, if you are consolidating debt or increasing the loan balance by drawing some of your available equity, you may want to extend the loan term back to 30 years as this will increase your loan serviceability and give you the flexibility of lower repayments at the same time.

Check how your home loan compares

2. Do Your Homework on Costs 

Keep in mind, there is more to a refinance than just the rate and loan term. Almost all refinances require an appraisal to determine your home’s current value, which can run several hundred dollars if your chosen lender passes this cost directly to the borrower.

Similarly, depending on the equity you have in your home, you may also have to pay for lenders mortgage insurance (LMI), which can add to the monthly payment and total interest payable during the life of you loan if you add LMI to your loan.

And, there are also settlement costs consisting mostly of statutory cost associated with transfer and registration of mortgage when refinancing.

The good news for refinancers who don’t need to pay LMI, statutory cost is negligible when compared to thousands of dollars you will save on refinancing. 

Do your homework by factoring in these costs with any savings you will get by refinancing. If you find that the cost of refinancing can be recouped by the savings offered by reduced interest rates within 12 months, chances are the new loan offering will really pay off in the long run.

3. Review Services Like Utilities and Insurance

While going through the refinancing process, consider reviewing all your utility and insurance providers. Use dedicated comparison sites to check if there are better electricity plan, home insurance and other similar commitments for you to move your accounts to.

Changing utility and insurance providers as you refinance could put substantial savings into your pocket, which you can deposit into your offset account and end up saving even more interest on your mortgage.

4. Switch to a Basic Loan Product

If your intentions are to pay down your loan as soon as possible and you don’t require bells and whistles of a packaged home loan, consider changing to a basic home loan. A basic loan product typically includes a free redraw facility and some lender even offer an offset account option for a monthly fee as well.

Most borrowers opt to take a packaged home loan, mainly because they want cost free offset accounts as well as credit card annual fee waiver that comes with it. These benefits of course are paid for by the annual fee on the home loan.

For borrowers who don’t want a credit card or prefer to use a no-frills card with no annual fee, paying a package fee, which can range between $300 - $395 annually just doesn’t make financial sense.

5. Compare Your Options

No two mortgages or lenders are created equal, over 80% of borrowers end up with either one of the big 4 banks or one of their sub brands pretending to be a different financial institute when there are over 50 other mortgage providers in Australia.

Interest rates and credit policies can change from lender to lender, as can things like application and discharge costs. Similar to what you would done when you purchased your property, comparing lenders for your refinance can help you determine the best loan to suit your goals and financial situation.

Tell us: Enjoyed this article? Tell us what other property related topics we should share blogs on.

And while you’re here, take our mortgage shredder challenge and discover how much you can save on your home and investment loans by using loansHub technology as your personal mortgage manager. To discover why loansHub and what we do, click here.

This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.