We all hear on the news and the TV that borrowers can go out and get a better deal and that the banks are ripping us off. So why is it that so few Australians switch their home loan in search of a better deal? We are lazy, unless we can see how much we are going to save then we wont do anything about it. Today I am going to show you in greater detail what the actual difference would be.
Firstly there are a few things worth mentioning regarding refinancing a home loan
- Some borrowers are misguided because when they enquire they are told their monthly repayment will be lower. This is often because they are offered a 30 year refinance for a loan where as originally they may have only had 15 years, the longer you need to repay the shorter the monthly repayment will be. If you are experiencing mortgage stress then this maybe an option. However consumers who think they are saving money are actually giving more money to the banks because they are now paying interest over thirty years instead of 15.
- Most of us have seen Wayne Swan on the news telling borrowers that if they want a better deal then they can swap banks. To give you an idea a 0.25% saving on a $350,000 loan with a 30 year term will save you around $57 per month. If you see the glass half full that's a $684 yearly saving. If you see it half empty it's only around $14 per week - enough for morning coffees. Today I am going to show you how to properly benefit from refinancing and that is by putting your savings back into the loan.
- Borrower's refinance to save money. The best way to save money is to understand your money, there are some very basic techniques that I will discuss in further blogs which help consumers to manager their debts more efficiently.
I'm going to mention this and it's the best way to save money on a loan - pay it off quicker. The table below shows that if we reinvest our poultry $14 per week beck into the loan then by the end of it you are saving $58,931. If you calculate the $14 per week out to the 27 years it would take to repay then you will find you have repaid an extra $19,656 into the loan. Putting in simply, you have put in $19,656 and saved $58,931.
As you can see refinancing your home loan can have its benefits but it must be done correctly. It should also be decision made as a part of a larger plan that works toward reaching your goals, for most people that is a home without a mortgage. In the coming months I will be blogging about other issues around managing home loan debt which will help people save money.
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