The economic impacts of COVID19 on the Australian property market have seen an unprecedented surge in homeowners refinancing their home loans, looking to save on their mortgage repayments.
The Australian Bureau of Statistic’s latest data on Australian lending showed the number of people who refinanced in May was 50% above normal levels.
Thanks to the current economic climate and record low-interest rates, the competition between lenders to gain new business is fiercer than ever, creating the opportune environment to refinance.
In an interview with Business Insider, Finder insight manager Graham Cook said, “Historically low interest rates and a lack of investor spending are a double whammy to banks, but a boon for mortgage holders.”
Job losses and an unstable economic outlook are the driving factors behind the large increase in home loan refinancing.
The desire to shrink household budgets is seeing droves of mortgage holders seeking out lower interest rates in order to save money on their monthly home loan repayments.
In an interview with The Sydney Morning Herald, Canstar finance expert Steve Mickenbecker said, “The average variable interest rate is 0.53% lower than a year ago – and you can do far better than that if you shop around”.
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Refinancing can allow mortgage holders to enjoy immediate savings from lower interest rates, in addition to reducing the life of the loan with the ability to pay it off faster.
The decrease in new lending, coupled with a dip in investor activity has forced banks to find creative ways to entice existing and new customers.
ABS lending data reported that nearly two-thirds of refinanced loans were with new lenders, further increasing competition between lenders.
Currently, 22 banks and lenders across Australia are offering cashback incentives as high as $4000 to refinance with their institution.
A number of these incentives are attached to loans with less competitive rates, and buyers are being cautioned not to make a decision strictly based on the upfront reward.
Speaking with news.com.au RateCity research director Sally Tindall said that those looking to refinance should prioritise lower interests rates over immediate perks.
“A low rate is almost certainly going to beat a one-off perk, usually by tens of thousands of dollars”, she said.
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The Sydney Morning Herald’s money contributor Nicole Pedersen-McKinnon outlined the savings that could be made by shopping around for a more competitive interest rate.
“If you move a $400,000 home loan from a typical discounted big-four bank interest rate of 3.6% to the cheapest loan with an offset account or 2.3%, you would save $79,677”, she said.
Ms Pedersen-McKinnon advised that loans should be refinanced over the same period you have remaining on your existing loan, to avoid paying considerably more interest.
It is recommended that anyone looking to refinance understands all the costs involved before committing to a new loan.
Even with the increase in refinanced loans, only 6% of mortgaged holders made the move in the 2019-2020 financial year.
The data indicates that a potential 4.6 million households could be saving on their mortgage repayments by refinancing their loans.
Of course, not all of these households will be eligible, especially in the current economic climate.
However attractive refinancing may be to mortgage holders, the usual home loan application process still applies.
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Mortgage holders looking to refinance should calculate potential savings to ensure they are getting the best deal.
Prior to refinancing it is essential to understand and budget for possible ongoing fees, application fees, exit fees and break costs.
With lenders more competitive than ever to snag new business, this is the best time to shop around and compare products.
Words by Nell Matzen
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