Steep RBA rate hikes over the past 18 months have led to a huge uptick in the number of Australians refinancing their home loan.
Many were shocked into action after suddenly finding themselves paying much more each month, after having enjoyed an extended period of historic low rates.
Not only had the official cash rate been at 0.1% since Covid coughed its way into town, but there hadn’t been a rate increase by the RBA for more than a decade regardless.
So, many of us had grown complacent. And in that period of complacency, banks took advantage and let their customers snooze away while on too-high repayment rates.
Now, though, we are awake, engaged and looking for a better deal, so let’s take a look at the main advantages of refinancing.
Lowering interest rates
If you have been paying off your mortgage longer than a year, you will certainly not be on the best deal, especially if you have been paying variable interest rates the whole time.
And thanks to compound interest, paying even 0.5% too much on your interest can cost you more than $100k over the life of a loan.
Lenders reserve their best deals for new customers or existing customers who threaten to leave, so assume there are better deals out there. First, shop around online or get in touch with a Zinger Finance mortgage broker. There are lots of comparison sites now that will give you the rates of many lenders in the one place, along with the features that might make or break the deal for you, while a broker can talk you through the process in detail and help you understand what may or may not be right for you.
Reducing monthly payments
The best way to reduce monthly payments is to get lower interest rates, but there are a number of other options should you refinance.
You may have 20 years left on your loan term, but need to boost your cashflow. You could do this by refinancing to a longer loan term, such as 30 years. You could also refinance to interest only if you are currently paying down the principal.
Of course, if you pay less by the month using these methods, you will usually end up paying more over the term of the loan, so think about why you are doing it. If it’s to free up money to put into further property investment, that means you are still making the money work for you. If it’s to help pay for something you otherwise couldn’t afford, like a holiday, that may not be such a good idea.
Many property investors will refinance regularly to access equity in their portfolio, especially if they’re looking to use value gains to expand their wealth further. It can be a great way to keep investing, or fund value adding renovations, without having to save cash every time for deposits.
Equity is the value of your asset, minus what you still owe on it. If you owe $200,000 on a property that’s worth $300,000, your equity is $100,000. But you can’t use the whole lot. A lender may allow you to use equity on 80% of the value of the asset, depending on individual risk factors and other circumstances.
If you have found yourself in the unwelcome position of having a number of higher interest debts (read bad debts like a personal loan or credit cards) that you’re struggling to get on top of, refinancing can be a way to roll them all into a mortgage and secure a lower overall interest rate to pay them off on. Of course, a better scenario would be to not have credit card or personal loan debt in the first place.