Refinancing can save you thousands of dollars

Alex Soncini

The Reserve Bank this month lifted the official cash rate to 3.6 per cent, the highest level in more than a decade, which is pressuring the finances of many households. This is the largest and fastest rate rise ever implemented historically by the RBA. We may not have seen the end of increases as the RBA may believe there is still a need to continue to increase rates if there is still strong domestic data.

Given the high home loan interest rates, with more rate hikes likely to come, is sparking a refinancing hunt for more home loan savings as mortgage holders shop around for a better deal.

Borrowers who have not refinanced could be missing out on hundreds of dollars in savings.

Australians have enjoyed a lengthy run of record low rates, with almost a quarter of all borrowers paying 6.5 per cent or more on their variable rate loans, based on Canstar modelling, which is 1.81 per cent higher than the cheapest loan rate.

For these borrowers, failing to shop around for a better deal can add $570 or more each month to a standard $500,000 loan over 30 years and for those borrowers with higher rates than 6.5 percent refinancing to the lowest priced loan could lead to savings of more than $1,000 a month on a $500,000 loan over 30 years.

Many borrowers seeking to switch lenders, refinancing to the “lowest” rate loan in the market may not always be successful because of harsher loan serviceability requirements and lower loan to value ratios as property prices decline.

However, mortgage holders should continue the “hunt for a better deal” to reduce the cost of their mortgage as refinancing even for a marginally lower interest rate could save you thousands of dollars over time. Refinancing can save you thousands.

You may want to be loyal to your lender, but chances are your lender won’t reward that loyalty with its market leading rate. Most often lenders reserve their best rates for new customers, not existing ones and customers may find refinancing will get a better deal.

Borrowers should understand that lenders examine discretionary spending when assessing credit worthiness and will assess you not at the current interest rate, but at a rate approximately 3 per cent higher meaning borrowers must be able to meet repayments at assessment rates ranging between 7% to 10%.

Now is the time for carefully planning your next move, do your homework on other lenders, check your finances, budgeting, cutting discretionary spending as lenders will review these when considering a loan application.

Refinancing and loan renegotiation activity is likely to remain high, as borrowers seek to reduce their mortgage costs. There are many offers for refinancers as loan applications for purchases have declined since the start of the year.

It’s more important now to have a discussion with a broker and discuss your options whether you’re refinancing or wanting to purchase a property. So don’t underestimate the importance of searching for a good deal, the mortgage market today is competitive, with plenty of bank and non-bank lenders offering a variety of loan options to all types of borrowers.

In saying this, borrowers must consider the whole loan product and associated fees and charges rather than just the interest rate. A factor to consider is to try to avoid extending your loan back out to 30 years, as this could potentially increase the cost with the extra interest accounted for.

Refinancing can be an opportunity to review your situation and look for a better rate.

Especially if you’re coming off a fixed rate loan that you’ve had for several years.

If you aren’t sure how to proceed, it might be a good idea to have a chat with Alex from Wealthwiz to discuss your options. We’re here to help.