Is now a good time to refinance?
With interest rates falling to record lows, it's a good time for many Australians to consider refinancing their home loan.
Depending on your circumstances, refinancing to a different home loan could save you a significant amount of money. And for a lot of borrowers, now could be a good time to think about switching. Here's why.
Interest rates are relatively low – for new customers
The main reason to consider home loan refinancing is because interest rates are relatively low right now. In an effort to stimulate the economy, the Reserve Bank of Australia has made multiple cuts to the cash rate. This has made borrowing costs cheaper for lenders and they have passed this on (in part) to some of their customers in the form of lower interest rates.
But there's a catch. Lenders aren't obligated to pass these cuts onto their customers. And if you already have a home loan, chances are your rate isn't that low because many lenders only offer their lowest rates to entice new customers.
This means that comparing rates is essential when considering whether to refinance.
Here's a quick example of how much you could potentially save by refinancing. Let's say you are 5 years into a 30-year home loan, making principal and interest repayments. You have $450,000 left on your loan and your interest rate is 3.30%. Your original loan amount was $500,000.
3.30% may have been a competitive rate not too long ago. But depending on your circumstances it may not be anymore. Let's calculate the hypothetical savings if you refinanced to a home loan with a fixed rate of 1.90%. We've used Finder's loan repayment calculator to compare repayments before and after switching.
Assuming a new loan term of 25 years, and a new loan amount of $450,000, here's how much you'd potentially save in the first year after you refinance:
- Estimated monthly repayments at 3.30% over 30 years: $2,189
- Estimated monthly repayments at 1.90% over 25 years: $1,885
- Your new repayments would be around $304 a month cheaper, saving you an estimated $3,648 in the first year
Of course these are just example interest rates and calculations and don't take into account loan fees, package fees, switching costs or any future changes to your interest rate after the fixed period has expired.
See if you could save by switching using Suncorp Bank's refinance calculator.
Fixed rates are low, but variable rates could fall even further
While variable rates have historically tended to be lower than fixed rates, both rate types are relatively low at the moment. In fact, many lenders are currently offering lower rates on fixed rate loans.
This means that you may be able to get a lower interest rate, regardless of whether you move to a fixed rate loan or a variable one. The decision to go with a fixed or variable rate isn't always about getting the lowest rate. It's often a question of balancing flexibility with certainty. If you're really happy with a low fixed rate and prefer to know exactly what your repayments will be for a year or two, then fixing is an option to consider.
Should everyone be refinancing now?
Now is undoubtedly the time for many Australians to think seriously about refinancing. But before you rush to submit an application with a new lender, be sure to examine your current situation carefully.
You may not want to refinance in the following situations:
- Your equity is below 20% of your property's value. Equity is the value of your property minus any debts remaining. For example, if your home is worth $800,000 and you have $400,000 left on your mortgage, then your equity is 50%. If you try to refinance your home loan with under 20% equity, your new lender will likely charge you lenders mortgage insurance (LMI) even if you've paid it before. This is why you need to consider potential LMI costs when considering refinancing.
- Your income has shrunk recently. A lot of Australians are struggling financially as a result of COVID-19. When refinancing, your new lender will examine your income and expenses all over again, and it could be harder to get your refinance application approved if you've lost your job or your income has recently decreased.
- You currently have a fixed rate home loan. Refinancing a fixed rate home loan will incur break fees. Depending on how long is left on the fixed term of your loan, this can cost you a significant amount of money. If you have a fixed rate loan, enquire about breaking costs with your current lender before refinancing.
While every borrower needs to examine their own situation carefully, now is definitely the right time to at least think about refinancing.