5 things you need to know about refinancing your home loan in the current climate
With interest rates so low it's a great time to refinance, but COVID-19 and the current economic outlook mean you have to do your homework.
There doesn't seem to be a lot of good financial news at the moment. But it actually is an unusually good time to be a borrower in search of a better home loan. Interest rates are very low and lenders want your business.
But refinancing your loan in the current climate is far from simple. Here's what you need to know.
1. Rates are very, very low right now
Home loan interest rates in Australia have never been lower. This is because the Reserve Bank of Australia has cut the official cash rate six times since June 2019, driving down lenders' own costs and making rates cheaper.
These rate cuts came about for multiple reasons but the economic damage caused by COVID-19 is one of the biggest.
Economics aside, borrowers need to know one thing: there are some very low rates on the market right now.
Not very long ago your home loan rate was decent if it started with a 3. Now if it doesn't start with a 1 you're missing out.
Here's a quick example to show how much you can save.
Let's say you have a 30-year home loan with an interest rate of 3.3% p.a. (which is the average, according to borrower data from the Finder app).
With a loan amount of $400,000 you'd be looking at a monthly repayment of $1,752, according to CommBank's repayment calculator.
Now if you switched to a more competitive rate, for example, a 4-year fixed rate from the Commonwealth Bank at 1.99% p.a., your monthly repayments would be $1,477.
That's a difference of $275 a month or $3,300 a year.
2. Your lender might only be offering its best rates to new customers
But lenders don't always pass on these low rates to all their customers. Unfortunately, it's often up to the borrower to take matters into their own hands.
Your lender may be offering very low rates for new customers while keeping you on a higher rate.
So what can you do?
- First of all, check your current rate and visit your lender's website to see what rates are on offer.
- If your lender is offering a better rate for the same type of home loan as yours, ask it to cut your rate to match. The worst it can do is say no.
And that takes us to the next point.
3. Many lenders are offering cashback offers or other incentives to make you switch
If a better deal is available then it's time to think about switching. In the competitive, low rate environment brought about by the pandemic, many lenders are keen to get your business.
This comes in a few forms, the most obvious being low rate offers for new customers.
Some lenders are offering generous cashback for borrowers who make the switch. These cashback offers usually have some form of eligibility criteria. You may need to refinance a certain amount or apply by a certain date.
For example, Commonwealth Bank is offering $2,000 cashback for a limited time for both homebuyers and investors refinancing loans worth $250,000 or more.
Some lenders are offering cashback incentives as part of a package loan deal, where you get a home loan, an offset account and other financial products in exchange for an annual package fee. While these can be good deals, keep in mind that the package fee, over a few years, could end up costing you more than you get from the cashback.
There are also lenders offering discounted variable rate loans. These are very low rate loans that stay low for an initial discounted period and then will jump a bit higher later on. These products can still represent a pretty good deal but just keep in mind that the initial rate won't last.
4. COVID-19 is making everything a little bit harder
Borrowers refinancing in the current climate also need to keep in mind that COVID-19 is making everything more difficult. And this applies to lending as much as anything else.
Many lenders are taking a lot longer to process loan applications now. This is understandable when so many companies have most of their employees working from home. Be prepared to wait a little longer than you would in ordinary times.
This applies to your mortgage paperwork too. Refinancers need to gather and submit various documents for their loan applications. With so many businesses shut or working remotely it will take longer to complete even mundane steps such as printing documents, finding a witness or verifying your ID.
5. Lenders are looking at your application very closely
The economic impact of COVID-19 has justifiably made lenders more cautious about lending. Rising unemployment and economic uncertainty means the chance of a borrower defaulting on repayments is higher than it was before the pandemic.
To avoid getting your loan application rejected you need to examine your financial situation carefully. Look at the following:
- Your employment. If you have a stable full-time job and your income hasn't fallen during the pandemic you're probably in a strong position. But a lender may be hesitant to accept your application if you work in an at-risk industry such as tourism. And even if your income is steady your company may be claiming a JobKeeper payment on your behalf. This can make you a riskier prospect as well.
- Your equity. Make sure you have at least 20% equity in your property. Try to estimate the current value of your property minus your remaining loan debt. If this falls under 20% then you will have a harder time refinancing and your lender will require you to pay lenders mortgage insurance. This cost will likely outweigh the savings that come with refinancing.
- Your spending and income. You may have found your spending habits have changed drastically during the pandemic. And if you run your own business or are self-employed your income levels may have changed just as dramatically. Take a close look at your spending and income before refinancing. Your new lender certainly will.
For the right borrower, the pandemic actually represents a good time to switch and get a better home loan deal. It just requires a bit of patience, careful research and a clear assessment of your financial situation.