Refinancing explained: Is it just about finding the lowest interest rate?
There’s one word on the lips of money-conscious property owners as home loan rates fall: Refinancing.
After the Reserve Bank slashed the official cash rate to 0.25 per cent, feverish lending competition resulted in some of the lowest rates in living memory.
And existing borrowers have seized the opportunity.
According to the Australian Bureau of Statistics, a record $7.9 billion in owner-occupier home loans were refinanced in April – 50 per cent higher than the year before – as banks lowered rates towards the 2 per cent mark.
Experts, however, say borrowers should consider more than just the interest rate.
How much can home owners save by refinancing?
The RBA’s snapshot of Australia’s owner-occupier market revealed the average variable rate offered in May was 3.28 per cent.
But if customers move to one of the lowest variable rates offered by the big four banks, they could save nearly $4000 if they switched five years into a 30-year mortgage.
That’s according to exclusive analysis by RateCity.com.au, which found the number above doubles to almost $8000 when borrowers move to one of the big four bank’s lowest two-year fixed rates.
RateCity.com.au director of research Sally Tindall said there are three ways borrowers can approach this new lending environment.
“You can capitalise by refinancing to a different lender, having a tough conversation with your existing lender about getting a rate cut, or potentially switch to a fixed rate,” Ms Tindall told The New Daily.
Ms Tindall cautioned, however, that fixed-rate mortgages are more restrictive, with customers often charged expensive exit fees for terminating during the fixed rate period.
Beyond rates, what else should home owners consider?
Choosing a new loan comes down to individual circumstances, such as whether the borrower intends to pay off their debt quickly, or whether they desire special features.
Hero Broker founder Clint Howen told The New Daily home owners also have to factor in their long-term goals.
“Is your plan to put an extension on your property? Is your plan to buy and move in a few years’ time? Or is your plan to tap into your equity and buy an investment property? Those things might change what’s best for you,” Mr Howen told The New Daily.
Customers should also look closely at the features and products each loan offers.
For example, some loans offer offset accounts, which are accessible savings accounts that reduce the amount of interest payable on the loan. And others only offer redraw facilities.
Although both features allow customers to get ahead on their mortgage repayments, the key difference is that money held in a redraw facility is technically the bank’s, while money held in an offset account is the customer’s. (Find out more here.)
It’s also worth noting here, too, that redraw facilities are not covered by the Australian government’s $250,000 deposit guarantee, should your lender become insolvent.
More broadly, the fixed versus variable conundrum is enough to make people’s heads spin.
Mr Howen has a basic rule of thumb: Never fix your home loan for more than two years, as this minimises the risk of paying higher than the lowest variable rate, and makes it easier to switch if you do.
He also advises home owners to capitalise on today’s record low rates, by devoting the savings they bring to paying off their loan much faster.
Is refinancing quick and easy?
In rosier economic times, the refinancing process could take roughly three to four weeks.
But now, the average refinancing period is two to three months, due to ballooning waitlists, and stricter lending criteria designed to protect lenders from bad loans, Mr Howen said.
“For example, ANZ came out with a really attractive rate, which was 2.19 per cent fixed for two years with $4000 cash back. But considering how many borrowers were interested, the timeframe to get your application seen blew out from sub-seven days to 30-plus days,” Mr Howen said.
Lenders are questioning prospective borrowers about their job and income security in greater detail. And this often entails requests for letters from employers and updated payslips.
Stricter lending is particularly noticeable in Victoria, with banks more reticent to offer new loans to those in lockdown.
To go big, or go small?
According to the Australian Financial Group’s Index, the flow of business towards the big four lenders and their subsidiaries topped out at roughly 70 per cent during the pandemic.
However, some of the market’s most competitive rates are offered by smaller lenders that operate solely online, with the market-leading fixed and variable rates offered by Tasmanian-based Bank of Us and Freedom Lend respectively.
RateCity.com.au’s Ms Tindall said this could be explained by customers’ hesitancy to deal with an institution that doesn’t have branches.
“But it’s all about personal choice,” Ms Tindall said.
“Fundamentally, if you’re someone that really likes the idea of going into a branch and speaking to a branch manager about your loan, then choosing one of the big four, or bricks-and-mortar banks, might be the right option.”
Is it worth working with a broker?
Hero Broker’s Mr Howen said engaging with a professional takes the guesswork out of reading a fast-changing market.
Brokers are equipped to advise home owners on choosing the product that best suits their financial circumstances, he said.
“There might be a panel of lenders offering a similar rate but one has a shorter waiting period and facilities that tie in with your situation, and so the broker will walk a home owner through the whole process and ask the right questions of lenders,” Mr Howen said.
However, a report from ASIC released last year suggested more than half of all customers who worked with a broker only received two or fewer options to contemplate.