Key Points
- The cash rate now sits at 4.10 per cent after the RBA cut it from a high of 4.35 per cent.
- That cut is providing many mortgage holders hope they may be able to find a cheaper deal by changing lenders.
- Aside from interest rates, other factors such as fees and loan terms should be considered when making such a move.
Many Australian mortgage holders expressed relief when the on Tuesday.
Now, some are looking to make the most of the improved borrowing conditions, with financial comparison site Mozo tipping a "refinancing frenzy" as almost half of all Australian mortgage holders consider refinancing.
Rate cut prompts mortgage holders to consider shopping around
RBA's 0.25 percentage point cut resulted in official interest rates which had reached a 13-year high of 4.35 per cent brought down to 4.10 per cent.
A Mozo survey of more than 1,000 respondents found 49 per cent were considering or planning to refinance their home loans in the wake of the cut.
"While some borrowers are ready to act, others are choosing to stay put, possibly waiting for more clarity on future rate movements," said Mozo spokesperson Rachel Wastell. "But whether you’re looking to refinance now or down the track, it’s crucial to shop around, compare rates, and check if your bank is passing on this RBA cut in full."
Sally Tindall, data insights director at financial comparison site Canstar, said when there's a rate change, "people re-engage with what their interest rate might be, and some people are prompted to look around and see if there's more competitive rates".
For an average owner-occupier with a $600,000 loan, Tuesday's cut translates to a $92 reduction in their minimum monthly repayments. Source: SBS News
Fixed or variable
to their customers, meaning those on variable rates will have their interest rate reduced by that amount in the next few months.
Sarah Orr, a spokesperson for financial comparison site Compare The Market, said the majority of Australians with mortgages have their interest rates set to variable, with only about 2 per cent having fixed rates.
Tindall said those most likely to consider refinancing are borrowers with variable interest rates.
"You tend not to refinance if you're on a fixed rate because if you do, you're breaking your fixed rate, and you could be up for break fees," she said.
She said such fees depend on "what variable rates are doing and how much of a financial impact that vendor has from you breaking that contract".
Mortgage-related fees
While it may be an interest rate cut that has prompted many to reconsider their current lender, there are other costs associated with loans outside of the interest rate offered.
Tindall said there are discharge fees, state government fees, upfront fees, and ongoing account fees to take into consideration.
She said the lender that a person moves their loan away from usually charges a discharge fee of about $350, and while state government fee varies, it usually costs about another $300.
"Then you will be essentially hit with upfront fees from your new lender," she said.
Tindall said costs from the new lender could include various fees, such as settlement, application, valuation, or legal fees.
However, she pointed out there are lenders who do not charge any upfront fees and said it is always worth asking if a new or existing lender is willing to waive fees.
There are also fees and other costs that a mortgagee may have to cover over the life of the loan.
While Tindall admitted it could be difficult to compare all the different factors against one another, she said people could look at the comparison rate to give them an idea about the impact those would have on the total cost of the loan.
"The comparison rate is a really good guide to help you understand what fees and charges you might not realise are in a home loan," she said. "And it's not just fees and charges, it could be that you might be taking out an introductory rate loan where the rate changes after a certain period of time, so it goes up after a certain period of time, rather than down.
Timeframe of repayment
Orr advised mortgage holders to avoid lengthening the term of their mortgage when refinancing if their goal was to reduce the overall cost of the loan.
Orr said potential lenders might suggest a loan term of 25 or 30 years despite a person having a shorter term left on their current mortgage, which can prove costly.
"If you move your loan term out, it's really important to know that you'll be paying more interest over time," she said.
"It might help ease your repayments in the present day, but you'll pay a lot more interest if you are continuously stretching that loan term back to 30 years, so if you want to aggressively pay down your loan, it is best to reduce the loan term as you refinance."
Sarah Orr, spokesperson for Compare the Market, says the recent rate cut means more people will be looking to secure an interest rate below 6 per cent. Source: Supplied
Understand your own situation
While comparison websites may often rank what they have calculated to be the best loans on offer, Tindall said understanding your individual situation was the only way to identify the best options for your circumstances.
As well as fees, this would include factors such as the current interest rate, any built-in changes to the rate in the loan, the term left of the loan, potentially beneficial features such as offset accounts and the loan-to-value ratio.
"Don't rely on your bank to tell you whether you are on a good or bad rate," Tindall said.
"It is worth understanding exactly how much you would save from refinancing over a timeframe, maybe it's two years, or whatever the case may be, till when you next refinance, and then factoring in the fees and the cost of refinancing, and then weighing it up against haggling with your bank."
She said the lower the loan-to-value ratio, the more attractive rates a mortgagee may be able to get.
At the same time, those whose loan is more than 80 per cent of the value of their property would likely have to to refinance, which could outweigh any potential savings.
Staying with a current lender
Most people who refinance their mortgage are looking for a better offer, but Tindall said existing lenders are sometimes willing to provide that.
"One of the good ways to go about that is to go and get yourself a competitive quote from different lenders that you can show your bank, show them that you're serious about refinancing if they are not willing to give you a further rate cut," Tindall said.
"You might find then, that your bank drops your rate significantly in order to keep your business."
At the same time, Tindall said there are some mortgagees who will be unable to refinance with other lenders as they are in a position she described as "mortgage prison".
"When you go and refinance, the bank has to put you through all the stress tests that they would apply to a new lender," she said.
"Some people overstretched themselves and took on more debt than they perhaps could handle compared to their incomes, and now that we're under a significantly higher rate environment, they're finding it difficult to refinance because they can't pass those stress tests, even if they are applying for a rate cut now," Tindall said.
What is a good interest rate?
Orr said a good rate in the current market "would start with a five".
"We were seeing some of the better rates in the low sixes before, so now we'll start to see five start trickling back through now that the rate cut has happened," she said.
"Certainly, if your rate is in the high sixes or 7 per cent, then you should definitely look and see if you can get a better rate."
The information in this article is general in nature and is not intended as financial advice. You should consult with a licenced professional to make the decisions that are right for you.
