With rates cut, should you refinance your home loan? It’s tricky – here’s how to tell
With rates dropping across the market, it's well worth looking at what you're paying right now.
The Reserve Bank of Australia (RBA) cut the cash rate last week for the third time this year. That led to almost all banks and lenders announcing they were cutting their cash rates in response.
With lenders dropping their rates, this is the ideal time to take check of your own home loan rate. But even if you find a lower rate, it doesn't necessarily mean you should refinance.
Here are some of the reasons why refinancing might work for you and some of the reasons why it might not. As always, there's no right answer for everyone so you need to make your own calculations and take your personal circumstances into account.
The appeal of refinancing
You could save money. Even a 0.25% cut in your interest rate can save you money. The more home loan you have to pay off, the more money you'll save. So it's really important you calculate your own savings to see if it's worth it. But it's not just about that, as we'll get to.
You could get extra features. If your home loan is particularly feature-free at the moment, like you don't have an offset account, refinancing your home loan to a product that gives you those benefits could be worth the hassle.
You could access extra cash. If you want some emergency funds in your offset account for a rainy day or you'd like to do some renovations, you can refinance to borrow extra cash. As long as you've paid down enough of your home loan, you can usually borrow back up to 80% of the property value. If you're keeping the cash in your offset account you won't be paying interest on that extra bit of borrowing. And if you use the cash for renovations or another use, you're probably paying less in interest than you would with a personal loan.
Find a better home loan
Take our easy quiz and see how much you could save.
Why you might not want to refinance
It might actually cost you more. Leaving your current home loan comes with fees and applying for a new home loan often comes with fees too. Don't just calculate the cost of your savings, but the cost of switching your home loan too. It might be that it costs you more in year one but you start saving again in year two, and whether that's ok is a decision only you can make. Remember to think about any ongoing fees that might come with your new loan too.
You're on a fixed interest rate. Ending a loan during its fixed rate period can cost a lot of money. Not only is it a large upfront fee but it might take a few years for you to recoup the savings.
You have access to good features. Very often the lower rate home loans don't come with as many features as those with slightly higher rates. You might be paying a bit more but you could have access to features like an offset account or a credit card package if that's what you need. Use of an offset account could save you much more money in the long run so be careful that you're not jumping the gun in exchange for a lesser product.
You plan to move soon. If you've got plans to upsize, downsize or relocate, switching your home loan might not be the best move. You'd have to pay twice over in fees to discharge your loan and apply for a new one, so any savings you potentially make might not be worth the effort.
As with most financial decisions, the decision on whether or not you should refinance for a lower rate is dependent on your own circumstances. Compare interest rates now to start calculating how much you could save, to see if it's right for you.
Sources
Ask a question