When should you refinance your home loan?

Last week, markets tipped that the next Reserve Bank of Australia (RBA) cash rate increase could come as early as February 2022. But with a generation of home buyers having never experienced a rate hike, many may be wondering if now is the right time to refinance their mortgage.

With the key three-year bond rate growing to five times the RBA’s 0.1 per cent target, the Reserve Bank may be encouraged to lift the cash rate earlier than it’s projected 2024 date.

The RBA has consistently maintained that it does not expect to increase the cash rate until key inflation targets are met – predicted to occur in 2024 at the earliest. However, inflation is rising, with the Australian Bureau of Statistics recording an increase in consumer prices by 0.8% over the September quarter.

This increase, which has seen inflation climb by 3% in the twelve months to the September 2021 quarter, comes off the back of a 7.1% increase in fuel prices and a 3.3% increase in new dwelling prices due to rising construction costs.

Now, markets are betting that this rise in inflation may drive the Reserve Bank to lift the cash rate sooner rather than later, pricing in a 75% chance of a rate hike in February 2022.

Regardless of market conditions, any homeowner knows it’s unrealistic to expect their mortgage rate to not fluctuate over a 20-30 year loan. But with the last RBA cash rate hike occurring in November 2010, there may be an entire generation of home buyers who have never experienced a cash rate hike.

And with almost a quarter of new home loans being written for at least six times the income of borrowers, an increase to their mortgage repayments may put millions into mortgage or financial stress. Especially for first home buyers, with property values across Australia continuing to increase – particularly in capital cities.

We’ve previously explored what may happen to a mortgage holder if interest rates increase, with one of the most popular solutions being to consider refinancing to a lower-rate lender. For homeowners across Australia nervous about a rate rise, you may be wondering how to know when you should refinance your home loan?

When should you refinance your home loan?

It’s important to note that refinancing your mortgage is a serious decision and you must weigh up the benefits and drawbacks against your current financial situation, including your credit score, before signing on the dotted line. No two homeowners are the same and it’s crucial you take stock of your own budget and financial needs before considering refinancing.

That being said, here are some popular reasons a homeowner may want to consider refinancing – particularly if interest rates are tipped to rise in the next few years.

 

 

 1.  Your fixed rate loan term is coming to an end

If you’ve been making fixed rate repayments on your mortgage and prefer this interest rate type, but your fixed term is coming to an end, it may be worth considering refinancing to a new fixed rate home loan.

Normally, your current lender will automatically switch your monthly repayments on to its standard variable rate (also known as the revert rate), which is typically a much higher rate. Your current lender will usually allow you to start a new fixed rate term, but if interest rates have increased during this period, you may find the new interest rate is much higher than before.

This is where it may be worth comparing low fixed rate options in the market (and their comparison rates) and potentially refinancing to a more competitive fixed rate lender. Reduce Home Loans 1- and 2-year fixed interest rates currently sit below 2%, making them some of the most competitive in the market.

 

 

2.  You want to protect your repayments from a rate hike

Speaking of fixed rates, one of the biggest advantages of this interest rate type is that it may offer some protection for your budgeting and repayments from rate fluctuations.

If you’re currently making variable rate home loan repayments, you may have done your own research and feel that the cash rate may increase soon. In this case, you may be considering refinancing to a fixed rate home loan to lock in a lower interest rate while you still can.

While there is no guarantee you’ll be protected for the life of your loan, nor can anyone perfectly predict rate increases, locking in a fixed rate mortgage (particularly a longer-term fixed rate of 3-5 years) may offer a sense of stability in your finances over that period of time.

 

 

3.   Your lender has been hiking rates out-of-cycle with the RBA

Are rate fluctuations a common occurrence with your home loan, despite the cash rate staying on hold at 0.10% since November 2020? If your home loan lender has already begun hiking your interest rates, or if you feel you’re paying a higher-than-average interest rate with your home loan, you may want to consider refinancing to a new lender.

Out-of-cycle rate fluctuations can make it challenging to budget for projected cash rate hikes, as your lender may lift your rates more than once in a short window of time. Any rate fluctuations will impact not only your budget but your chances of falling into mortgage stress (paying more than 30% of your income towards your mortgage).

If your lender has been hiking rates and/or you feel your interest rate is now too high to comfortably service, it may be worth looking at lower rate options. For instance, Reduce Home Loans offers the lowest variable rate home loan in the market to refinancers with an LVR of 60% or less through its Super Saver 60 Home Loan.

 

 

 

Ask yourself the following Questions

 

So, should you consider refinancing your mortgage right now? It may be worth asking yourself the following questions:

  1. What rate am I currently paying, and am I happy paying this?
  2. Am I on a fixed or variable interest rate? (If the former, refinancing before your fixed period is over may sting you in break costs).
  3. Can I comfortably repay a mortgage at a higher interest rate – even 1-2% higher – on my current income?
  4. Can I use my current home loan features (offset account, extra repayments or a redraw facility) to reduce my loan principal or my interest charges to make repayments more affordable without refinancing?
  5. How much home equity have I built up through my monthly payments, and would I need to pay lender’s mortgage insurance (LMI) if I refinanced?

 

If you’re still not sure whether or not to refinance your mortgage, it may be worth speaking to one of our home loan experts at Reduce Home Loans on 1300 733 823.

 

Any statement/s are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.

(29)    For the Rate Cutter Variable where the borrower pays $1170 upfront fees then a corresponding loyalty discount of 0.10% p.a. off the Rate Cutter Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(27)    For the Investor Rate Slasher Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Slasher Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(26)    For the Low Rider Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(25)    For the Economizer Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Economizer Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(24)    For the Super Saver Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.10% p.a. off the Super Saver Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(23)    For the Super Saver Variable where the borrower pays an upfront fee of $1170 then a corresponding loyalty discount of 0.15% p.a. off the Super Saver Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(22)    For the Economizer Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.11% p.a. off the Economizer Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(21)    For the Investor Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(18)    For the Home Owners Dream 1 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(20)    For the Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(14)   For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(12)   For the Investor Rate Lovers Interest Only where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.07% p.a. off the Investor Rate Lovers Interest Only rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(11)   For the Wealth Maximizer 3 year fixed Principal & Interest where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(10)    For the Wealth Maximizer 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(9)    For the Home Owners Dream 3 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(8)    For the Home Owners Dream 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(7)    For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(6)    For the Investor Rate Buster Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Investor Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(5)    For the Rate Buster Variable where the borrower pays an upfront fee of $150 then a corresponding loyalty discount of 0.05% p.a. off the Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(4)For the Rate Slasher Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.08% p.a. off the Rate Slasher Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(3) For the Investor Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Lovers Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(2)For the Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Rate Lovers Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(1) For the Low Rider Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(28) For the Rate Crusher 1 Year Fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.05% p.a. off the Rate Crusher reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(19) For the 1 Year Fixed Wealth Maximizer where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the 1 Year Fixed Wealth Maximizer reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.