Interest rates have been on hold for seven months now, and that’s seeing a growing number of home owners making a rate cut of their own by refinancing their mortgage. It’s a strategy that can result in savings but it also involves costs, and borrowers need to weigh up the two to see if refinancing really puts cash back in your pocket.
The Reserve Bank of Australia (RBA) has kept the official cash rate stable at 2.5% since August last year. According to comparison site RateCity, that’s prompted a ballooning volume of refinancing activity. Around $27 billion worth of homes loans shifted between lenders in the last six months of 2013 as home owners attempted to capture a lower rate.
It’s certainly worth taking a look at how your home loan compares to the broader market because, on average, standard variable rates are currently 0.54% lower than they were 12 months ago. Three-year fixed rates have come down too, falling by around 0.33% over the same period.
Some of the best deals are offered through smaller lenders and non-banks. IMB for instance is offering a 1-year fixed rate of 3.99%. Loans.com.au has a variable rate of 4.49%.
Shifting to a cheaper mortgage can lower your monthly repayments and provide savings on the overall cost of the loan. The downside of refinancing is that it involves additional costs, and the sooner you recoup those outlays with the new loan, the better. A timeframe of around 12 to 18 months is reasonable – any longer, and it’s a fair bet another loan will come along that could save you even more money.
Let’s say, for example, that upfront fees on the new loan plus government charges like registration of the new mortgage, and discharge fees for paying out the old loan add up to $1,200. If the new loan lowers your monthly repayments by $100, it will take 12 months to recoup the refinancing costs ($1,200 divided by $100). Any longer, and you run the risk of being in much the same position in the not so distant future.
In a bid to stem the refinancing tide, some lenders have started offering loyalty bonuses. Non-bank lender State Custodians rewards borrowers with a rate discount of 0.25% after five years. UBank encourages borrowers to stick with their loan with a loyalty discount of 0.1% that kicks in after three years. These sorts of perks also need to be weighed up against the savings – and hassle, of refinancing.
It’s good financial sense to review your home loan from time to time to check that it still meets your needs and remains competitively priced. However in a highly competitive mortgage market it’s a fair bet that sooner or later a loan will come along that’s cheaper than your own.
Rather than flicking between loans and lenders every couple of years, it can pay to choose a lender with consistent track record of competitive interest rates. Paying a bit extra off the loan each month is another simple way to enjoy big savings on the long term interest charges.