Low interest rates and cashbacks take center stage in the refinance conversation far too often. But while interest rates, cashbacks, even fees are important to stay on top of it is the ‘loan term’, that has the potential to save you thousands
If you take anything away from this article, it is to consider using a broker, rather than going direct to banks. They will take everything into account, not just how much you will pay the bank.
When refinancing, your priorities should be in the following order:
Loan Term
Interest Rate
Ongoing Fees
Cashback
Let’s see what all of these points in isolation actually saves us over the years. If we take the common scenario of a $500,000 loan with 20 years left at 6.49%, being refinanced to 5.49%.
1. Loan term
Loan term refers to the amount of time you have to repay your loan. Going straight to banks for a refinance, they will typically push you out to 30 years again, as the lower repayments can be attractive in the short term. What they gloss over, is the amount of interest you pay to the bank in the long run, as a result of extending the loan term.
A good broker will take this into account, as they are bound by ‘best interest duty’ to act in your best interest, plus it’s good business to do right by clients.
Difference Loan Term makes for a $500,000 loan at 5.49%
Scenario | Loan Term | TOTAL Cost |
Loan 1 | 20 years | $325,086 |
Loan 2 | 30 years | $442,314 |
You’ll save $117,228, just by keeping your loan term at 20 years.
2. Interest Rate
Clearly refers to the rate of interest you pay on your loan balance per annum.
By reducing your interest rate from 6.49% down to 5.49% has the following effect on a 20 year loan
Scenario | Loan Term | Interest Rate | TOTAL Cost |
Loan 1 | 20 years | 6.49% | $394,231 |
Loan 2 | 20 years | 5.49% | $325,086 |
The reduction in interest rate saves the client $69,145 over the period of 20 years.
3. Ongoing fees
With these, among others, I am referring to the $395 that most of the offset packages cost. By considering a free redraw option that essentially does the same thing, you can save yourself 20 times that fee.
Save $7,900 in fees over the final 20 years.
4. Cashback
Cashback puts $4,000 back in your pocket.
In summary, the savings over the life of the loan of a $500,000 loan refinancing are divided as follows
Keeping loan term at 20 years saves $117,228
Reducing the interest rate saves $69,145
Getting rid of unnecessary fees saves $7,900
Cashback puts back in your pocket $4,000
How Polaris Home Loans could save you $198,273
We understand the need for short term focus, with the cost of living rising rapidly. If this is your focus, then by all means tell your mortgage broker and work out a solid short term strategy to reduce your repayments.
However, it is so important to be aware of the long term implications.
At Polaris Home Loans - we'll help you achieve your financial goals based on your current situation.
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