July 19, 2018
A lot of Australians follow the standard mantra – why refinance when you can just forget about that huge mortgage looming over your head and take a set it and forget it approach? Why go through the hassle?
But, there are some compelling reasons to be more proactive with your home loan. Even if you aren’t trying to refinance to unlock equity for a renovation project, an investment property, debt consolidation, or other reasons, there is still a really good reason to keep an eye on how your mortgage compares with the loan you could have if you refinance.
If you can find a more competitive mortgage rate out there for you, you could save a lot of money.
For example, with a $400,000 loan, getting your rate down half a percentage point will translate to tens of thousands of dollars in savings over a 25 or 30-year mortgage.
Despite this fact, Australians are not rushing to refinance every couple of years. A new study reveals why.
A recent survey by CoreData of more than 1,500 mortgage owners reveals some of the reasons why refinancing isn’t on many homeowners’ list of priorities – even though about half believe they aren’t getting a good deal on their mortgage.
- Loyalty– 90% of mortgage owners who haven’t refinanced with a new bank in the past say they don’t want to change lenders, at least not for a 0.2% rate reduction.
- Laziness– People aren’t refinancing because of the hassle. Many simply aren’t motivated enough to research loan products and current rates, even if it means more money.
- Not wanting a financial review– Half of those who haven’t refinanced before say they don’t bother because they don’t want a third-party to review their finances.
For many people, this may come down to a fear of being judged. People don’t jump at the idea of revealing the details of their financial lifestyle with a complete stranger – a mortgage broker or loan officer from the bank. As a result, more people are starting applications online or just staying out of the process altogether.
But, when you look at the numbers, you may rethink your lender loyalty, lack of motivation, or other barriers to refinancing.
With even a 0.2% rate reduction, with a $500,000, 30-year mortgage, you could save $21,000 in interest.
Refinancing to a 0.5% lower rate would translate to over $50,000 in interest savings on a 30-year loan.
Knowing the potential cost savings, it’s, at least, worth it to compare your loan with what other lenders are offering. You also can watch for refinancing deals like rebates or cheap introductory rates, which could help you save even more money.
In the current interest rate climate, there’s another reason why you may want to look into refinancing.
Interest rates in Australia are still low, with the RBA sitting on record lows since 2016. At some point, the RBA is expected to increase the cash rate. In talks this spring, officials acknowledged that the rate is more likely to go up than down, although the when could still be months, even years away.
Here’s the thing. If you have a variable rate loan and the cash rate goes up, you can bet your lender will raise your mortgage rate as well, along with probably every other bank in Australia. This means your repayments will increase, as will the amount of interest you’ll have to pay. In fact, the major banks like Westpac and NAB started inching up rates in 2017, and smaller lenders have been following suit since then.
Depending on how tight your budget is, rising rates can become an issue. It can throw off your budget if you suddenly owe another $100 or more a month, which means you’ll have to sacrifice other expenses just to keep up with your mortgage.
This is why some first-time homebuyers are considering fixed rate loans or, at least, are fixing the rate on part of their loan. With a fixed rate, if market rates go up, you know the fixed portion of your loan will stay the same for a pre-determined period. However, with interest rates being so low, some borrowers don’t want to leave it all variable and are choosing the option to fix part of their loans.
There’s no guarantee that rates will rise and a fixed rate loan will prove to be a smart move, but it’s something you want to consider, especially if you’d have trouble managing a higher repayment amount.
It is another reason why some Australians are taking the initiative to refinance now. If you can refinance before rates go up to a fixed rate loan, you can protect some of your finances. Switching to a fixed rate loan may also offer a lot of peace of mind.
Mortgage rates change over time. So do your financial needs and goals. These are almost laws of the universe! So, why shouldn’t your home loan evolve as well?
Refinancing does come with some risk and can include a variety of costs including exit fees, application and valuation fees, and other expenses, so look at the whole picture before you apply for a new loan. But, if you do find that you could save, are the reasons you may be putting off refinancing really worth it?
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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