To refinance or to stay put?

There are costs associated with refinancing. Government Fees for Registration and Discharge of Mortgage and a Title Search Fee might add up to $250. Then the bank you are leaving might charge you a settlement fee of $250. The average cost is probably around $500-$600 unless you are breaking a fixed interest rate. Anyway, you should always check.

But the main reason people refinance their home loans is not always about savings.

Firstly, refinancing gives you the chance to get a higher limit so that down the track you can redraw more funds if you need to. It’s a good idea to think ahead like this. Remember, circumstances may change such that you can’t increase your loan in a couple of years. Of course, you only pay interest on your loan balance (what you use), so many choose to increase their limit every few years. If you are not so financially disciplined, this may not be appropriate for you. I have been told “if it’s available I will probably withdraw it” – hmmm.

The other reason people refinance their loans is to get their finances structured perfectly. I always write about offset accounts and how linking your credit card to your offset account will give you interest-free money for up to 55 days on all your electronic purchases. It’s financially powerful but also great for lifestyle. You would never need to get online and manually transfer funds to your credit card if the full amount owing is automatically swept every period. This way you will also never pay a cent in interest.

So, there you go. It’s not all about the interest rate. Having said that, 99 out of 100 people would be shocked at how much they could reduce their repayments if they refinanced their home loan. The banks are fiercely competing for new bank clients, with discounts up to 1.2% off the standard variable rate for the life of the loan. How can they do this? It’s because 80% of people haven’t recently asked a broker to look at their current deal. It’s their complacency that lets the rest of us enjoy these discounts. Yes, the 80/20 rule surrounds us all.

And now with banks sometimes offering $1,000 to new bank clients, you can actually profit by improving your situation.