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Is the cheapest rate really worth it?

Posted by Grace Mackay

With interest rates at an all time low, many banks are offering up great mortgage rate deals for property owners and buyers.

But sometimes owners and buyers can be caught unawares by cheap advertised rates that aren’t actually suited to their situation.

There are a number of things you need to consider when securing a home loan rate or refinancing.

Interest saved on an annual basis

If you’re looking at refinancing with a cheap new rate, it’s vital you determine the interest saved on an annual basis.

Calculate the difference between your current rate and the new one on offer, and compare the interest amount.

If the loan balance isn’t significantly different, it may not be worth refinancing at all.

You also need to ensure you compare the payments on a prospective loan term and match them against what is remaining on your current loan.

Don’t extend the loan term out to 30 years, otherwise you are starting your repayment of the debt again.

You could end up paying more interest over the term of the loan than what you thought you were saving.

Some banks will not reduce the loan term to match what you have left, which means you’ll have to adjust your repayments to pay off the new loan in the same term left on your current loan.

Watch out for lender’s mortgage insurance clauses

If you paid lender’s mortgage insurance (LMI) on your current loan, you may think you’re exempt from paying it again.

Mortgage insurance is specific to one loan. If you refinance this becomes a new loan and the insurance may be payable again.

The new valuation will determine if you have to pay LMI on the new loan.

If you are required to pay LMI, it may not be a financially sound move to refinance with that bank product.

Not all interest rates suit all loans

Often the cheaper rates are only for loans below an 80% loan-to-value ratio.

If your loan-to-value ratio is higher than 80%, you won’t be able to use the cheap rate at all.

Note: be sure to take into account that the value of the property is determined by the bank’s valuation and not the price you paid for it.

Consolidating personal debt

Should you want to consolidate your personal debt to take advantage of a low home loan rate, be careful to not just add it to your home loan over a longer term - you could end up paying more interest than you were going to before.

But this really depends on the reason behind consolidating all your debts together.

Is it to improve your cash flow or to reduce the interest you are going to be charged?

If you are able, maintain the same repayments on the new loan as you were paying on all the debts prior to consolidation. Then the interest saving will be significant.

The key when looking at a new home loan rate is to ensure you are aware of all the costs involved - including ongoing fees and charges - and to ensure there’s a significant financial saving in changing to a new rate.

You may find you’re better off making additional payments on your current loan, or making weekly repayments instead of monthly repayments to reduce the interest charged.

Investigate every angle (or get the help of your mortgage broker) to ensure the bank can provide for what you want to do both now and in the future if you take up their advertised rate.

If you’re looking at getting pre-approval or refinancing your loan, speak to Kelby at We Find Finance about securing the best rate, suited to your situation.

Kelby can also show you the benefits additional repayments on your home loan can have and possible debt consolidation strategies to get you there faster.

Call 1800 600 890 or email kelby@wefindfinance.com.au

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