Although refinancing your home loan in a rising interest rate market may seem like a daunting prospect, understanding the advantages may be the positive catalyst for change.
The Reserve Bank of Australia’s swift and steep rise of the cash rate throughout 2022 has seen many Australian households feel the pinch as mortgage repayments rise. The average repayment on a $800,000 mortgage has risen by $1,000 per month from April when the cash rate was at a record low of 0.10 per cent. With the current cash rate set at 2.35 per cent, and expectations that further rises are on the horizon, the incentive for refinancing has never been stronger.
With most lenders regularly passing on these rate rises to their borrowers, what are some of the advantages in refinancing?
- Cheaper Interest Rates for New Customers
Lenders will always provide the best rates to new customers compared to their established customers. Although this may seem counterintuitive in not rewarding loyal mortgage holders, the harsh reality is that most lenders take the stance that their customers don’t have the patience or time to move lenders. Through advertising lower rates and attracting new customers, banks fight hard in incentivising new business whilst carving out the profitability of existing customers who become complacent with their rate.
Most banks will almost always pass on any cash rate rise set by the Central Bank due to changing market conditions and the need to manage internal margins and costs. It is not uncommon for a home loan customer to have a higher interest rate than what may be offered to a new borrower in today’s market, even though they may have only settled on their mortgage 12 -24 months ago.
- Cash-Back Offers
With lenders competing hard for new business, cash-back offers are becoming increasingly used as a way to incentivise existing borrowers to move lenders. In addition to offering cheaper rates, some lenders are also offering a cash-back reward in moving lenders which can be anywhere from $2,000 to $5,000 in some instances. Depending on lender and the terms and conditions relating to these cashback offers, substantial savings can be secured in these circumstances.
- Resetting Loan Characteristics
An advantage to refinancing allows the opportunity to reset loan characteristics such as the term of the loan, the type of repayment (i.e. interest only or principle and interest on investment loans) and the type of rate such as, fixed or variable.
Throughout the course of any mortgage, many life changes and goals can occur so refinancing to a new lender and changing the loan characteristics to suit your current needs is a good way to ensure your mortgage is right for you. An example of this would be moving lenders and pushing the term of the loan back out to 30 years to ensure your monthly minimum mortgage repayments are as low as possible. By doing so, you may improve your monthly cash flow position whilst simultaneously acquiring a lower rate.
- Ability to Access Equity
A savvy way to access equity within your property is to refinance to a lender offering a cheaper rate whilst also accessing the equity in the property without dipping into hard earned savings. This equity could be used for home improvements or other investments which opens up opportunities whilst also ensuring you have a competitive mortgage rate.
It is important to note that refinancing does come with associated costs so it is important to speak to your broker to ensure that you are in a position to refinance and the cost analysis is done to ensure it is a financially wise move for you.