With interest rates continuing to rise, many homeowners are facing higher mortgage repayments. But could you be paying more than you need to?
The Reserve Bank of Australia (RBA) increased the cash rate to 4.60% in September, its fourth increase this year and the highest level since November 2011. For homeowners, these increases provide another reason to review whether their current mortgage is still competitive.
ASIC’s Moneysmart notes that variable home loan rates can differ by more than two percentage points across the market, meaning you could be paying considerably more interest than necessary.
If your current rate is no longer competitive, refinancing could be one way to reduce your borrowing costs. Refinancing means replacing your existing home loan with a new one, either with your current lender or a different provider. A lower rate is a common reason to switch, but it isn’t the only one.
When is refinancing worth considering?
Your interest rate, property value and financial circumstances can all influence whether your existing mortgage is still suitable. Here are some situations when refinancing may be worth exploring:
1. Your interest rate is no longer competitive
Even a small rate reduction can make a difference. Cutting the rate on an $800,000 loan from 6.5% to 6% would lower monthly repayments by about $247, saving approximately $2,967 a year, assuming 25 years remain on a principal-and-interest loan.
2. Your fixed-rate period is ending
Once a fixed period finishes, your loan will generally revert to a variable rate, which may be higher than others in the market.
Start comparing options before expiry and consider whether another fixed rate, a variable rate or a split loan suits you best. This gives you time to weigh up your options rather than automatically accepting the rate your lender offers.
3. Your home has increased in value
If your property has grown in value, you may have more equity than you realise. A lower loan-to-value ratio (LVR) can open the door to more competitive rates. If you have at least 20% equity in your property, your LVR may be 80% or less, potentially strengthening your position when negotiating with lenders.
You could also access that equity to fund renovations, although increasing your mortgage means taking on more debt. Ideally, you should aim to keep your total loan balance at or below 80% of your property’s value to avoid potentially having to pay lenders mortgage insurance (LMI). Keep in mind that lenders will assess your financial circumstances and the property’s current value before approving a new loan.
4. Your loan no longer suits your needs
Your circumstances may have changed since you took out your mortgage. An offset account or the ability to make extra repayments could help reduce interest costs, while a redraw facility may provide greater flexibility.
Some borrowers also refinance to consolidate personal loans or credit card debt into their mortgage. Monthly repayments may fall, but spreading short-term debt over a longer term can increase the total interest paid.
When refinancing doesn’t add up
A lower rate doesn’t automatically mean a better deal. Discharge fees, application costs and government charges can reduce your savings. Depending on your circumstances, you may also face fixed-rate break fees or lenders mortgage insurance (LMI) if your new loan exceeds 80% of your property’s value.
Extending your loan term can also increase total interest costs, even if your monthly repayments fall. For example, refinancing a mortgage with 20 years remaining into a new 30-year loan could mean paying interest for an additional decade.
However, you don’t have to extend your loan term when refinancing. If you can afford the repayments, you could refinance to another 20-year term and still potentially benefit from a lower interest rate.
It’s also worth considering whether you’d qualify for a new loan. If your income has fallen, your expenses have increased or your employment circumstances have changed, you may find it harder to meet a new lender’s borrowing requirements.
A mortgage broker can help you weigh up the potential savings against the costs of refinancing, compare suitable loan options and determine whether switching would leave you better off financially.
Is it time to review your home loan?
Refinancing isn’t necessarily the right move for everyone, but reviewing your mortgage can help you identify opportunities to save money or find a loan that better suits your circumstances.
Whether your fixed term is ending, your rate is no longer competitive or recent increases have pushed repayments higher, Just Imagine Finance can help you compare loan options and assess whether refinancing is worthwhile. To discuss your options, contact us at catherine@justimaginefinance.com.au or call 0414 673 359.
