How does refinancing work? What you need to know

The last year has seen Australians flock to their Mortgage Choice broker to switch to a more competitively priced home loan. In January 2021, $10.1 million worth of home loans nationally were refinanced in just one month¹. By June 2021 that figure had soared to  $17.4 million².

So what is refinancing and why is it especially important right now?

How refinancing works

‘Refinancing’ means taking out a new home loan with a different lender to replace your current loan. Sure, it can mean filling out some paperwork just as you did when you applied for your old home loan, but a small effort can reap big rewards.

That’s because plenty of lenders are saving their cheapest rates for new customers³. By sticking with your old home loan you could be paying a costly home loan loyalty tax – money that comes straight out of your pocket and into your lender’s.

How much could you save?

Reserve Bank data shows the average variable rate for established home loans is currently 3.07%⁴ though you could be paying more. On the flipside, the average rate on new loans is a tiny 2.73%.

To see the potential savings of switching, let’s crunch some numbers. The average home loan being refinanced is worth $458,000⁵. At the average old rate (remember that’s 3.07%) you could be paying around $2,188 in monthly repayments⁶. Switch to a new loan with a rate of 2.73% and you can expect to pay $2,108 each month – a saving of  $80 every month.

That works out to an extra $960 in your pocket every year! Even better, over the life of the loan, you could pocket over $24,000 in total interest savings⁷.

Like to know what you can save by refinancing? Head to your local Mortgage Choice broker to know for sure.

When and why should you refinance?

If you’ve only recently taken out your home loan, you can be confident your Mortgage Choice broker recommended the loan best suited to your needs – and you’ve got a pretty good deal.

However, home loans should never be a ‘set and forget’ part of your life.

That’s why Mortgage Choice brokers offer each customer an annual home loan review. If you’ve had the same loan for several years or longer it’s definitely time to see how it stacks up against the broader mortgage market. Chances are you could save with a lower rate.

Refinancing isn’t just about scoring savings. It can also help you achieve important personal goals.

Switching to a new loan can be a way to access home equity, providing low cost funds to buy a new car, renovate your home, or invest in a rental property.

Refinancing can also help if you’re juggling multiple debts. Folding a variety of different debts into a single home loan means making just one repayment each month. And, as your home loan is likely to have the lowest interest rate of all your debts, consolidating your debts this way can lower your total monthly repayments.

Refinancing to a fixed rate mortgage

If you’re keen to lock into today’s super-low interest rates, refinancing can give you peace of mind that you won’t be impacted by possible future rate hikes (for the fixed term you choose).

A fixed rate also makes it easier to budget for loan repayments as they’ll stay the same during the fixed term no matter how market rates move.

Property Outlook: How long will interest rates be this low?

As we head into the second half of 2021, the issue of refinancing has taken on a degree of urgency.

The Reserve Bank has repeatedly said it doesn’t expect to lift the official cash rate until at least 2024⁸. Despite this, a number of banks have already hiked their long term fixed rates⁹. It’s a strong sign that lenders expect rates to rise in the future.

But that’s not all. Home values have skyrocketed in 2021,  rising 14.1% nationally over the first seven months of the year and 16.1% higher over the past 12 months according to property research group CoreLogic¹⁰.  

Moreover, CoreLogic expects housing markets to remain positive, saying “Advertised supply is around record lows and housing demand will continue to be supported by low interest rates¹¹”.  

This matters because there is some speculation that credit policies could be tightened, especially has the Reserve Bank has warned that it will be watching for any slip in lending standards¹².

The upshot, is that it could be harder to refinance in the future. And that could leave you lumbered with a higher rate home loan than necessary. 

To find out more about refinancing – whether it’s the right choice for you, and how much you could save, contact your Mortgage Choice broker today.