How much can refinancing save you?
By Luke Kidd
With interest rates increasing rapidly over 2022 and 2023, many mortgage holders are looking for a better deal on their loans to reduce costs or free up their cash flow. Today, we're going to shed light on the benefits of refinancing, with a particular focus on finding a lower interest rate. By refinancing your mortgage, you can potentially save a substantial amount of money over the life of your loan.
The Potential Savings:
Let’s look at the costs of holding a 30 year $500,000 mortgage with an interest rate of 5.25% and how much you would save by refinancing to a new loan with an interest rate of 5%. This seemingly small difference can translate into substantial savings over time.
Monthly Payments:
First, we can calculate and compare the monthly payments for both scenarios:
Scenario 1: Existing Mortgage (5.25% interest rate):
Using a standard mortgage calculator, the monthly payment on a 30-year loan at 5.25% interest would amount to approximately $2,761.
Scenario 2: Refinanced Mortgage (5% interest rate):
By refinancing to a lower interest rate of 5%, the monthly payment on the same $500,000 loan over 30 years would decrease to approximately $2,684.
Savings per month: $2,761 - $2,684 = $77 per month, which is $924 per annum.
Total Interest Paid:
Now, let's examine the cumulative savings in terms of the interest paid over the entire loan term:
Scenario 1: Existing Mortgage (5.25% interest rate):
Over 30 years, the total interest paid on a $500,000 loan with a 5.25% interest rate would amount to approximately $494,000.
Scenario 2: Refinanced Mortgage (5% interest rate):
Refinancing to a lower interest rate of 5% would result in total interest payments of approximately $466,000 over the same 30-year period.
Savings over the loan term: $494,000 - $466,000 = $28,000
Keeping the same repayments:
What would happen if we were able to reduce the loan’s interest rate but kept making the same repayments. How much more could be saved?
By refinancing to a lower interest rate of 5% and continuing to make the same monthly repayments of $2,772, you would be able to clear your loan in approximately 28 years and 2 months providing an extra 1 year and 10 months without debt.
The additional repayments will total approximately $26,000 over the life of the loan which will increase the interest savings to more than $61,000 over the life of the loan.
How can we help?
Our financial planning and lending solutions can provide valuable assistance in various ways when it comes to mortgage refinancing. Here are some ways we can help:
Understanding your needs: Our advice process can evaluate your overall financial picture, your financial goals to determine if refinancing is a suitable option for you. We can also help you understand the potential impact on your cash flow, budget, and overall financial plan.
Evaluating Refinancing Options: Our lending specialists can lend their expertise and review the various refinancing options available in the market. They can compare different loan products, interest rates, terms, and fees from different lenders to find the most suitable refinancing solution that aligns with your financial goals and preferences.
Calculating Potential Savings: Our knowledge and specialized tools can help you understand and estimate the potential savings of refinancing your loans. We can calculate the impact of different interest rates, loan terms, and repayment strategies, helping you understand how much you can save in terms of monthly payments, total interest paid, and overall loan duration.
Managing the Refinancing Process: Refinancing involves paperwork, negotiations, and coordination with lenders. Our lending specialists can guide you through the entire process, ensuring that all necessary documents are prepared, deadlines are met, and negotiations are handled effectively.
Please note that the figures provided are estimates for illustrative purposes only. Individual savings may vary based on various factors, such as loan amounts, interest rates, and loan terms. For accurate and personalized calculations tailored to your specific situation, we recommend you contact us today to discuss your situation and any questions you may have.
Luke Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001242685)