5 things refinancers need to know right now
As interest rates rise, refinancing is looking to be an attractive option for many Australians - but there are things you need to know first.
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The rising cost of living has made many people stop and take notice of their expenses in the last few months. Unfortunately, rising interest rates are also coming in at a time when people are feeling the pinch the most.
Unsurprisingly, this means a lot of Australians are considering whether now is the time to refinance their loans before rates rise even higher.
This will be particularly the case for those who have taken on a home loan in the past few years when rates were at historic lows, and for those coming out of fixed rate loan periods onto a variable rate.
If this sounds like you, or you're just after a better deal before rates continue to climb, there are a few things you need to know before you take the plunge and refinance.
1. Interest rates will continue to rise
We have seen interest rates already rising off the back of the Reserve Bank of Australia's (RBA) decision to lift the national cash rate. There have been two cash rate raises this year and considering that 2010 was the last time the rate was increased, this is a pretty big deal.
It also comes off the back of a record low rate of 0.1%, meaning people are really going to see the effects.
The increase in cash rate is in response to rising inflation, as the RBA hopes to increase the amount people are putting towards their loans and therefore decrease the amount of money in circulation.
Why do you need to know this? Because refinancing your home loan isn't necessarily going to stop you paying a higher interest rate than you're used to. Interest rates are going up, and probably will be for some time. Predictions from the big banks show we could be looking at the national cash rate reaching 2.6%.
When you're thinking about refinancing, you need to take this into consideration. The rate you refinance to may not stay your rate for long - so you should think about whether you choose a fixed or variable rate.
2. Whether you get a fixed or variable rate
When you look at the interest rate options for home loans, you might be tempted to go for the cheaper rate: but that might not necessarily be the best deal or most suited to you over the longer term.
Often, the cheaper rate you will see is the variable rate, which can change at any time. Like the name suggests, the rate is variable. With rising interest rates, this means your rate will be going up.
But a fixed rate, which is generally higher, will stay at that rate for the agreed-upon period.
Fixed rate loans tend to have much less flexibility, usually not allowing you to make extra repayments or pay off the loan early. It also means if you're already on a fixed rate loan, it might be hard or costly to get out of.
Your own circumstances and future plans for your property will have an impact on what type of rate will save you money in the longer term.
Having said that, if you haven't refinanced in a number of years you might find you're already paying a higher interest rate than you need to.
You can find more information on the difference between fixed and variable rate home loans here.
3. The right bank or lender to switch to
If you've decided to refinance then you need to consider the right bank to switch to. As mentioned, interest rates are going up no matter what, so it's not necessarily about looking for the same rate you started out on.
Particularly in an environment where cost of living is rising at the same time as interest rates, it's important to go to a lender you can trust to support you if things get tough.
Newcastle Permanent is customer owned, which means it doesn't generate profits for shareholders. Instead, it invests back into the local community.
Newcastle Permanent not only supports local clubs like community football and surf life saving clubs, and the Newcastle Permanent Charitable Foundation has funded more than 500 community projects across regional NSW.
In terms of being the right bank for a home loan, Newcastle Permanent knows how important each individual customer is. Because of that, the bank has a contact centre based in the Hunter region where staff are on hand to talk through any problems a customer may have.
Newcastle Permanent allows you to discuss your refinancing plans in whatever way suits you: over the phone, in person or online.
You can also look for deals and offers that banks have running, such as Newcastle Permanent's cashback offer. You can get up to $3000 in cashback for switching your home loan*.
4. How to research the property market
You should also understand the area you're living in. Work out whether the market in your area is one which is expected to grow, or whether it's expected to face a downturn.
Researching your market will be really helpful in working out the terms of your new loan. It will help you decide whether you want to stay there long term, and therefore commit to a longer-term loan, or it might help you consider whether you want to move sooner.
You can also get a better idea of your property's current worth, which may help you decide whether you want to refinance with additional money to make renovations.
Again, it all depends on your own circumstances, but understanding your suburb and the property you're in is really helpful in making any decisions.
5. How it will benefit you
When you're considering refinancing your home loan you need to think about whether it will actually work for your circumstances. Refinancing to a lower home loan rate might seem like a win-win situation, but it actually requires a little more consideration.
For example, if you're planning on selling your home in a year's time, refinancing to a new home loan now might not be worth the effort or cost.
You'll often have to pay a loan discharge and/or break fees to leave your existing loan, so it's also important to calculate whether any savings from a lower interest rate would actually balance out those fee costs.
If you took out your original loan with a smaller deposit, work out how much of the property you own now. If you still own less than 20% of the property it is probably not worth refinancing as the new lender will also make you pay lender's mortgage insurance.
At the other end of the spectrum, if you only have a small portion of the loan to pay off, the savings from refinancing may not be worth the effort.
Work out all of the fees associated with refinancing, the conditions of your existing loan and your own intentions before deciding whether or not to refinance.
*Refinance customers only. LVR ≤ 90%. $2000 cashback for loans ≥ $250,000, bonus $1000 for loans ≥ $500k. Applications must be submitted by 30/09/2022 and funded by 30/11/2022. Offers may be varied or withdrawn at any time. See the full Cashback Offer and Terms and Conditions and Bonus Cashback Offer Terms and Conditions at newcastlepermanent.com.au/terms-and-conditions. Terms, conditions, fees, charges and credit criteria apply. Newcastle Permanent, part of Newcastle Greater Mutual Group Ltd ACN 087 651 992, Australian Financial Services Licence/Australian credit licence 238273.
