Refinancing at the right time can save big

Loan Market CEO David McQueen.

ANALYSIS

This week it is widely anticipated we will see a cash rate cut, which would mean a decrease in interest rates in the weeks following, putting more money in the pockets of homeowners. We saw the first cash rate cut in over four years in February, and following that, Loan Market data shows a 63 per cent increase in refinancing activity.

Homeowners have been paying some of the highest interest rates we have seen in a decade and they are ready to move to a better deal. If there is another cut on Tuesday, we expect to see a lot of movement as people look to other lenders.

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Here is why.

Let’s look at an example of how much a homeowner could save. If the RBA cuts the cash rate by another 25 basis points, the total reduction since February would be 50 basis points. Say you had a $750,000 home loan on a 30-year term with a fortnightly repayment and your interest rate at the start of the year was 6 per cent p.a. – a 50 basis point cut would move it to 5.50 per cent p.a. That could save over $3500 in interest in the first year alone.

RBA Governor Michele Bullock is expected to hand down a rate cut on Tuesday. Picture: Martin Ollman

But here’s the insight: not all lenders will pass on that cut in full. While most passed on the February drop, history shows many banks hesitate when it comes to lowering rates. And when the cuts do come, they can be partial or delayed. Some also offer better interest rates to new customers than existing ones. This means not shopping around can lead to paying a loyalty tax.

Let’s say you refinance and lock in a full 1 per cent reduction. That simple move from 6.5 per cent p.a. to 5.5 per cent p.a. on a $750,000 mortgage could save over $170,000 over the life of the loan. That’s a big enough saving to make homeowners sit up and take notice.

If you don’t compare your loan regularly, chances are you’re paying more than you need to. Knowledge is power, enabling you to negotiate your rate with your current lender, or switch to a better deal if they don’t come to the table.

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The other trend we are seeing is over three in four home loans are prepared by mortgage brokers. This is because there are hundreds of lenders in Australia and thousands of loan products. Brokers can run the comparison on your behalf and let you know if refinancing is right for you and how much you could save if you switch.

David McQueen has five tips to make the most of lower interest rates.

If you’re ready to take control, here are five simple steps that can help you make the most of lower interest rates:

Keep your repayments the same

Even if your lender reduces your minimum repayments, if you can, stick to the higher amount. You’ll pay off your loan faster and save big on interest.

Compare and renegotiate your rate

Understand what rates are available and talk to your lender. It never hurts to ask for a lower rate, and if they won’t offer a competitive deal, it could pay off to switch.

Use your offset account wisely

Extra savings in an offset account reduce the interest on your loan without locking up your money. They’re a quiet achiever in your financial toolkit.

Make extra repayments

If you receive additional money, such as from a bonus or tax return, consider putting it toward your home loan. This could help you save on interest and pay off the loan sooner.

Talk to a mortgage broker

A broker can look at a holistic picture of your situation to determine if the structure of your loan is right for you. If you’re not using all the features in your loan, the switch to a more basic loan could potentially save you money.

David McQueen is the CEO of Loan Market.

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