With interest rates at record low levels, we’ve seen a big increase in homeowners wanting to refinance this year. So this week we’ll look at some of ASIC’s top tips for refinancing, plus some of our own for good measure.
More and more mortgage holders are looking for a better deal on their home loan.
According to ABS data, the total number of home loan customers who switched providers last year increased by 27% – from 143,664 in 2019 to 182,016 in 2020.
And a further 200,000 Australian families are expected to switch lenders and save in 2021.
But there’s switching lenders the wrong way, and switching lenders the right way.
Fortunately, Laura Higgins, ASIC’s Senior Executive Leader Consumer Insights and Communication, recently shared some important tips with ABC radio, which we’ve compiled for you below.
1. See if your current lender can cut you a better deal
Here’s the thing about the big banks and home loans: customer loyalty is rarely rewarded.
In fact, the RBA found that for loans written four years ago, borrowers were charged an average of 40 basis points higher interest than new loans.
For a loan balance of $250,000, that could cost you an extra $1,000 in interest payments per year.
“Many times, new customers are offered a better deal than existing borrowers, so if you have a home loan that is a few years old you could potentially get a better deal that saves you thousands of dollars over time,” explains Ms Higgins.
“Even if you’re happy with your current lender, it’s worth checking you’re not paying for features or add-ons you’re not using.”
2. Don’t jump at the easy money: do the maths
There are a lot of incentives out there to entice you to switch mortgages quickly, such as cashback offers or very low-interest rates.
But Ms Higgins urges borrowers to closely compare these offers with the long term costs.
“For example, it’s worth doing the maths to ensure a cashback offer still puts you ahead over the long term when considered against other aspects of the loan, like interest rates and fees,” she explains.
“If you decide to switch lenders, you may end up with a longer-term loan.
It’s also important to consider whether lenders mortgage insurance or other costs, like discharge and loan arrangement fees, may be payable.
“These additional costs can outweigh the benefit of a lower interest rate,” she adds.
“A mortgage broker can also help you compare loans and decide whether to switch.”
Which is very true, if we do say so ourselves!
3. Consider switching to an offset account or redraw facility option
With interest rates so low, many borrowers are aiming to pay off their mortgage faster by making extra repayments.
“Interest rates may be low now, but probably won’t be this low forever. Making some extra repayments now can benefit customers in the long term,” says Ms Higgins.
But if you’re worried about tying up all your funds in your home loan, then you can consider switching to a mortgage redraw facility or offset account, which can allow you to make extra repayments but withdraw them if you need to.
“Either of these options might work for you depending on your goals,” Ms Higgins adds.
“Not all home loans can be linked to an offset account, and often those that can may have a fee charged or a slightly higher interest rate, so it’s worth making sure you’d be saving enough in there to warrant any extra costs.”
4. To fix the rate or not? Or both?
Last but not least, a refinancing tip that we think is worth considering in this climate of record-low interest rates (which probably won’t be around forever).
One of the most common 'big decision' questions we get asked when it comes to refinancing is: should I fix my home loan rate or not?
But did you know a third option exists?
Yep, you can fix the rate on some of your mortgage, but not all of it.
This allows you to lock in a low rate for a portion of your home loan, while also taking advantage of some of the flexibility that a variable rate can offer, such as the ability to make extensive additional payments.
If you’d like to know more about it - or any of the other refinancing tips in this article - then get in touch today.
We’d be more than happy to help you refinance your home loan, whether that be renegotiating with your current lender or exploring your options elsewhere.
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