How Much Can You Save on a Home Loan?
Sunday 31 March 19
Or, how much do you want to pad the pockets of the banks? Really significant savings is very common when we refinance a home loan here at Grace Loans. Naturally the amount saved will depend on how much is borrowed, how bad the existing loan is and whether the borrower qualifies for a standard loan product. So, to get a better understanding of the savings, let’s look at some of the key factors:
Lower Interest Rate
A lower interest rate means that you pay less for the loan. Every payment on a typical home loan involves part that’s interest, and part that is reducing what is owing. As the payment amount tends to stay the same as the loan goes on, at the start, most of it is interest. But, as the amount owing slowly goes down, the amount paid in interest is lower, leaving more to go towards reducing what is owed.
Getting down to numbers, if you were able to get an interest rate that is 0.5% lower than your existing rate, and you had a loan of $500,000 then that’s a simple $2,500 per year savings. However, if you continued to make the same repayments, that has reduced the amount owing by something a bit over $5,000 during that year, which means next year the loan interest is calculated on a lower amount. For a 30 year loan, starting at 4.5%, with the 0.5% reduction in interest, the loan would be fully repaid 3 years sooner, saving $95,495.
Now, that’s just a rough idea, as interest rates are likely to go up and down during the life of your loan, but it gives you an idea of the stakes involved. In our experience, that level of savings is quite common, and we have seen a few clients with double that amount relative to loan size.
With lenders, there are many options regarding fees. There is often a no-frills, no fee option. With that, the entire cost of the loan is built into the upfront fees and the interest rate. And, that last one is what we just discussed above, so it’s worth weighing it up.
Often the basic no-frills loan doesn’t have an annual fee, but they may have a small fee that is paid for each account, something on the order of $10 per month. Some of those loans may have the lowest interest rate offered by the lender, but they have limited features, such as not being able to use an offset account with them or to use them for construction.
Most lenders will also provide the option of some sort of professional pack, tacked onto their standard loan. With the professional pack there usually are not any monthly account fees, and you might even get a free credit card, but there will be an annual fee of something on the order of $300 to $400. With the professional pack there will be a number of additional benefits such as being able to have a 100% offset account, and not having to pay any application fees for new loans.
Home Loan Apples and Oranges
When you are selecting a home loan, there is a lot to consider. It’s probably a good idea to begin with the features that you require. Is a 100% offset account required? Do you need a construction loan? Is it important to you to have a local bank branch to go to, or are you happy with online, electronic banking? This may reduce the universe of suitable loans to a few hundred or so.
The next step is to work out from among those, which will have the lowest cost. That’s not a simple thing to work out when you have a wide variety of different types of cost to compare. The good news is that you don’t have to do the maths. That’s one of the things that we do for you at Grace Loans. We can work out for you over the life of the loan, what the total cost is going to be, and point you to the lowest ones.
But before you jump into one of those, you also want to consider how long you are likely to have this new loan. While we hope that you will keep us as your mortgage broker for a lifetime, that doesn’t mean that you loan isn’t going to change. You may sell your home, or the lender’s interest rates may creep up (they typically do for all lenders), and five years down the track it may save you money to refinance for a better deal.
So, it’s a good idea to also look at the short-term savings over the length of time that you are likely to keep the loan. Again, that’s our role as a broker, to consider such matters. A key thing to take from this is that while not all loans are created equal, neither are brokers. There will be some that simply want to get you into a loan and get on to the next client. But for us here at Grace Loans, we truly care about you, and we want you to get the best outcome that we can find for you. It’s not the easy way, but it’s the Grace way.
We have kept this item separate from the others, because it has little to do with choosing the loan. It has more to do with what you choose to invest into your home loan, seeking a really good return on the money invested.
For the complete explanation, see “Invest in Your Home Loan,” but here we will simply look at what you can save.
Consider the example above of a $500,000 home loan at 4.5%. The normal monthly payments would be $2,533 per month, repaying the loan in 30 yrs. If you made payments of $3,000 per month instead, the loan would be repaid in under 22 years, with net savings of $125,746.
That’s something that you can do with nearly any loan*, but coupled with the other sorts of savings mentioned above, the results are fabulous.
* Keep in mind that some fixed rate loans will limit the amount extra that you can make in repayments, but most will allow a slight increase.
The bottom line is that you need to get in touch with Grace Loans today, and find out what the best available solution is for you. We will be glad to work on your behalf to get some fabulous home loan savings underway!