Refinancing or Consolidating
Austral Mortgage wil help you decide if refinancing or consolidating with the right choice for you
This page helps with
- Information for Borrowers looking to Refinance
- What to look for in a Home loan
- Our recommendations from the Austral suite of home loans
Should you Refinance?
Before deciding to refinance your home loan you should work out the costs of the refinance against what you will save in interest.
Points to consider
- Be wary of short term honeymoon or discounted variable interest rates because once the low rate period is over you may find the revert rate is higher than the interest rate you are currently paying on your existing mortgage. You could incur significant costs for no long term saving.
- If you are currently in a fixed rate loan you must find out what the breakcosts or exit costs will be before you consider refinancing.
- Break costs generally equate to the difference in your fixed interest rate and the rate at which lender can reinvest your repaid loan for a period equivalent to the remaining term of your fixed rate facility.
Here's an example
Sam and Sally have a loan of $350,000 and have fixed their rate for 5 years @ 7.5% p.a.
After 2 years they want to repay the loan and refinance to a lender offering 6% p.a. variable If there is no change in the new lender’s interest rate, this will save them 1.5%p.a or $15,750 over the remaining 3 years.
BUT... the fixed rate period on their current loan has 3 years to run. The 3 year fixed term deposit reinvestment rate with the bank is 4.5% p.a.
The difference between Sam and Sally’s fixed rate and the reinvestment rate is 3% p.a.
Their breakcosts will be approximately $31,500 ($350,000 x 3% x 3 years.)
The refinance exercise would cost them $15750 not save them the expected $15750.
Sam and Sally would be better to stay with their existing lender until the end of the fixed rate term and then look to refinance.
If you are consolidating debt you should consider the longer term position. Most people consolidate debt to improve their cash flow. While your cash flow will likely be better (because higher rates apply on personal loans and car leases) if you convert this shorter term debt to long term home loan debt then you will pay considerably more in interest while at the same time, in a lease scenario, the value of your vehicle will be declining. Ultimately you will end up owing much more than the car is worth.
Consolidating debt for a better interest rate
If you are consolidating debt for a better rate as opposed to real cash flow concerns then structure your loan so that it is split into separate accounts
- Home loan 30 year principal and interest
- Car loan 7 year principal and interest
- Personal loan 10 year principal and interest
Check out our home loan calculators to properly compare the savings you anticipate and the cost of repaying debt over a shorter vs longer term.
Want some advice? Contact us to chat about the right option for you