I have recently bought an apartment and have an outstanding loan for $200K. I looked around but the bank I presently bank with somewhat surprisingly offered me the best rate at 6.99% (discounted off their standard rate). After a few weeks of home ownership, I have been offered a 6.89% rate by the bank I had my home deposit savings with (they have a great high interest savings account). It will cost me $700 to exit my present loan. Does it make sense to move to the lower rate? Paying off the loan before the 30 years is very important to me. Neither loan has any additonal costs such as monthly fees, etc.
A tenth of a percent isn't much to write home about.
I'm assuming that Australian mortgages are similar to American mortgages. If this isn't the case, then take with a grain of salt.
It's only about $15 difference per month in your payment. You'll recoup in a few years, but it's a very small difference. Over the entire loan it's only about $5,000 in interest that you're saving.
If there are any other fees associated with the refinance, then it becomes even less worth it.
Now, if they dip by a percent or more, then definitely go for it.
You can find out the amount of time it will take for the refinance to pay off by using a refinance calculator. (I linked to that one assuming there aren't significant differences between US mortgages, which the calculator assumes, and Australian mortgages. If there are differences, you can probably find an Australian-specific calculator with a little searching.)
Is there a chance rates with fall further? $700 to save $180/yr is ok if rates don't go down and you refi again, and if you don't sell. On the other hand, we're not talking the kind of costs that you might find in the US, thousand in some cases.
Good on you for being proactive about this. If you do the maths, the interest you will pay looks like this: 200,000 x 0.699 = 13,980 p.a; 200,000 x 0.689 = 13,780 p.a.; Annual savings due to lower interest rate = $200 p.a.
So realistically, your savings isn't that big. $200 p.a. assuming you don't pay down your mortgage and you need to pay $700 break fee to save the $200. What's to say that the difference will continue and the second bank won't eventually increase their interest rate above the first bank?
So fundamentally, you need to ask yourself, is $700 upfront now worth more to you than saving $200 over a year or $16 per month.
If you want to do further analysis on your property investment, try this free property investment calculator at www.myinvestmentdecision.com.au
They've won a patent and it's completely free! Quick to sign up too. Worth it.
Good luck! Chuck
If paying off the loan before the 30 year mark is important to you, you might want to move your focus away from the interest rate and toward the extra principal amount you can pay every year without penalty. Most banks will offer you prepayment privilege of some sort. 10% annually, 10% on the renewal anniversary, or some such. Check your mortgage agreement or contact your loan officer to verify.
Visit any bank's online mortgage calculator and plug in your current mortgage details and note the payoff date. Now apply a 10% prepayment each and every year and note the payoff date. While amortization length and interest rate will move this number a little bit, paying down an extra 10% per year will retire a 30, 25, or 20 year mortgage in 6 years, saving you tens of thousands of dollars in interest charges a the same time. This strategy will save you orders of magnitude more money than chasing a 1/10% or 1/4% interest rate reduction.