What is the real cost of refinancing

Posted by Paul Ryan • 5 August 2014 • Tags:

The Reserve Bank August 2014 meeting saw interest rates remain on hold which now means the cash rate has not moved since August 2013.

These 12 months of stability has delivered a degree of comfort amongst home loan borrowers although there may be some disparity between comfort and confidence in terms of willingness to spend.

The stability in the cash rate has prompted another home loan war with each lender jostling for market share with discounted home loan offers and attractive fixed rate options. The key for all borrowers is to read the fine print, understand the comparison rate and please understand how the short term benefits can affect your financial position long term.

When borrowers look to refinance they tend to lower their monthly repayments or obtain a lower interest rate. In theory this works fine but one aspect of refinancing often overlooked is the time period you have had your existing loan and then the number of years for the new loan you sign up for.

For example, let’s look at a loan of $300,000 over 30 years at say 5.5% with the monthly principal and interest repayments being $1703.37pm.

If the original loan has been in place for 5 years and the borrower only paid the minimum repayments you can see in the chart that the borrower would still owe $277,381 with the total loan repayments over 30 years being $613,213.

HL - 300k.png

So for the first 5 years the borrower has made 60 monthly repayments at $1703.37pm. Total $102,202.20 however the principal balance has only reduced by $22,619.00.

Let’s now assume the borrower refinanced the exact loan amount outstanding over another 30 years with an interest rate of 4.99%. $277,381 over 30 years at 4.99% the monthly repayment will be $1487.35pm.

277381.png

By refinancing the borrower has reduced their monthly repayment from $1703.37pm to $1487.35pm, a saving of $216.02pm.... or is it a saving.

If in summary the borrower sticks to the minimum monthly repayments for the life of the loan. What was originally a $300,000 over 30 years has blown out to 35 years and the borrower has repaid a total of $637,646.91. That is an additional $24,433.91 than originally anticipated.

If you are looking to refinance to obtain a lower rate the trick is to keep making the same repayments as you were before refinancing. Long term you will have obtained a significant saving.

For any enquiries about saving money on your home loan get intouch with your nearest intouch Finance Principal

 


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