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Refinancing your mortgage to reduce the interest rate

Imagine interest rates are dropping but your current mortgage interest rate is several percentage points more than the current average with several years to run on your loan. Several choices are available to you at this point. First you could approach your current lender, and look to get what is called ‘an early renewal’ on your loan.

An early renewal will change the rate you pay to the new reduced rates available in the market. Usually, the lenders can charge a fee for this early renewal. A simple calculation on the interest saved versus the cost of the penalty on the loan can help decide whether to go ahead. It is a cut-and-dry system that provides far less complication than the alternative, which is known as “blended interest”

There is the possibility that some lenders will not charge you any penalties or fees for the change, but instead change your interest scheme to “a blended interest”. Blended interest is a blend of the current rate you are paying and the new lower rates in the market.

Put simply, based on the number of years left on your mortgage and the total length of the loan, you will get a rate somewhere between your current rate and the lower rates. This method can be better, especially if the rate decrease on an early renewal does not provide enough savings to offset the cost of the penalty. In this case, you will get some saving, even if it is not substantial.