What you can do with your refinance savings
5 min read
Getting a great deal when refinancing your home loan is wonderful, but have you thought about what to do with the extra cash that you’ve saved?
You could maintain your repayment amount even though you’re (hopefully) on a lower interest rate. You can do this by either shortening your loan term to increase your repayments to the original amount you were paying, or you could pay an additional voluntary sum towards your repayments. The bonus of this is you’ll pay off your home loan quicker and pay less interest over the life of the loan, and because you’ve previously been able to make this amount, you should be able to comfortably meet this commitment – just set and forget a direct debit payment, and off you go!
If you want easy access to the extra funds you’re putting towards your home loan (if you haven’t negotiated the shorter loan term), look for a lender who can provide a (free) redraw facility and/or the option of an offset account. It’s like savings on savings on savings.
Allocating your savings towards other debts is also another really good idea. No one likes sitting on a pile of debt that they can’t quite seem to pay down (maxed out credit card, anyone?). By paying down your debt, you should also be able to reduce the amount of interest you’re paying on it. And paying out debt, and paying off interest owed, will free up even more cash.
Putting your refinance savings straight into your savings account is one easy way to make the most of your freed-up cash. By adding the money you’ve saved from refinancing to a regular savings contribution, you’ll see your balance grow quicker for that rainy day. For instance, if your original repayment amount was $2,000 a month and after refinancing it drops down to $1,500 a month, aim to put that extra $500 in your savings at the end of the month, or make weekly payments of $125 if that’s easier.
Use your savings to clear that stack of debt
Why not put your savings to work by investing it? Those who have the ability to commit to an investment strategy long-term could consider this avenue. It’s not for everyone but we’ve listed options to suit everyone from the novice, toe-dippers and seasoned investors:
If you’re keen to invest, but not so keen on taking risks, a cash investment is a perfect option for the not-so-daring investor. Cash investment is the term for things like savings accounts and term deposits. Although the returns on cash investments are lower than other investments options, they are typically low-risk and provide stable, regular interest payments.
‘Round up’ accounts, provided by the likes of Up and Raiz, automatically round up your spare change and set them aside in interest-earning savings accounts, or invests them into a diversified portfolio of your choice. Find out more about Up and Raiz in our top 5 list of money and finance apps.
Bonds, investment bonds. They are basically a way to loan money to the government or to companies. By purchasing a bond, you are essentially loaning money to the issuer of that bond, who in turn pays you interest on the loan for the life of the bond. Once the bond has matured your original investment amount is returned to you as well. Like cash investments, bonds are a relatively safe investment option.
When you purchase shares in a company, you’re essentially buying part of that company. When the company’s shares increase in value, the value of your investment increases as well, and you may receive dividends (a portion of the profit) from your shares. Conversely, if the company’s shares decrease in value, so does the value of your investment. Shares are riskier for this reason because in order to make a profit from your investment, you’ll need to buy and sell your shares at the right time. However, the returns you can get from investing in shares have the potential to be much bigger than cash investments or bonds.
A managed fund pools your money, and money from other investors, into a fund which is then managed by a fund manager. The managed fund is then invested into a range of investment options. Profits from the investments are divided among the investors based on the amounts they originally invested. Investing in a managed fund does not guarantee you a positive return, so it’s important to keep this in mind.
A new emerging trend in investment options is cryptocurrency. Cryptocurrency is a form of digital money that (unlike real currency) doesn’t physically exist. Anyone can create a digital currency, so there are plenty of them around. Some of the more popular ones include Bitcoin, Ethereum, Ripple, and Litecoin. Cryptocurrencies are mostly used to pay for goods and services, but some can also be programmed and used to build new applications. All transactions involving cryptocurrencies are recorded using a digital ledger known as a blockchain.
There are many success stories of people investing their money early in a cryptocurrency to then have the value skyrocket, allowing the investor to cash out and make a big profit. But there are also plenty of instances where an investor invests substantial amounts of money into a new cryptocurrency, only to have its value stay the same or drop. In worst cases, some investors can have their whole investment disappear into thin air when the whole thing goes belly up or the creator of the cryptocurrency is a scammer (The BBC’s The Missing Cryptoqueen podcast series is both insightful and bingeworthy – don’t worry, you don’t need to understand cryptocurrency or blockchains to get hooked). Moral of the story? Do your research before you invest your well-deserved savings.
Crypto can be lucrative, but invest carefully
Like the investment options above, investing in property is not for the faint-hearted and requires long-term commitment. It can be a way for investors (or first home buyers) to enter the property market, or to help diversify and/or grow investments portfolios. We could go on, and on about this topic – and we have, here.
Talk about a rainy day - contributing more to your super (even small amounts) adds up over time helping you to prepare for retirement. There are many factors to consider like when to make the contributions (i.e. pre-tax or post-tax), how often you'll make extra payments, and concessional contribution caps. ASIC have put together a great guide on checking your employer is making contributions, how to boost your super, super tax deductions and the first home super saver scheme - check it out.
If your home is a bit on the older side, or just want to give your place a bit of a revamp, you could put your refinance savings towards renovating your house. When refinancing you may have the option to access the equity in your home to help fund a renovation. Just make sure that you work, and stick, to your reno budget.
Lastly, my personal favourite, treat yourself! Go out and splash some cash on something you’ve been wanting. You deserve it for being so financially savvy with your refinance.
Not sure which option (or options) are suitable for you? Don't take our word for it - invest in yourself and your future. See a financial adviser who can help you identify and reach your financial goals.