When the Reserve Bank decreases the cash rate, it usually signals falls in borrowing costs across the economy and can be good news for mortgage holders.
Movements in interest rates often act as a prompt to mortgage holders to review their borrowing arrangements. In fact, a recent survey data revealed that almost half (49 per cent) of mortgage holders are currently weighing up their options.i
A home loan is the largest debt most people will ever take on and it makes sense to pay off a mortgage as quickly and cheaply as possible. Refinancing isn’t just about chasing the lowest possible interest rate. Lower interest rates can certainly be a drawcard, but if you are considering refinancing, think about how it fits into your broader financial situation.
What does refinancing really mean?
In simple terms, refinancing means replacing your existing home loan with a new one. The idea is to secure a better deal – whether that’s a lower interest rate, better loan terms, or more flexibility with your repayments. Refinancing can be a good opportunity to take advantage of lower interest rates following a cash rate cut. Before making any decisions, there are a few things to consider first.
Fixed vs. variable
A cash rate reduction primarily benefits those with variable-rate loans, as the interest rate on these loans typically correlates with the Reserve Bank’s decisions. If you’re on a fixed-rate mortgage, you may not immediately see a reduction in your repayments.
That said, if you’re nearing the end of your fixed-term, or unhappy with the terms of your fixed-rate loan, refinancing to a variable-rate could allow you to benefit from the lower rates, however, you may incur break fees. Remember, with a variable-rate mortgage, there’s always the risk that the rate could increase again in the future, so you should weigh up that risk against the potential savings.
On the other hand, if you value the certainty of knowing exactly how much you’ll pay each month, you might prefer to lock in a fixed-rate, even if it’s slightly higher.
Refinancing gives you the opportunity to choose a loan structure that best suits your preferences and financial situation.
Loan features and flexibility
It’s easy to focus on the interest rate when refinancing, but don’t forget about the features and benefits of your loan – like offset accounts, the ability to make extra repayments, and redraw facilities, which can give you more control over your mortgage.
When refinancing, assess whether the new loan will offer the same (or better) features as your current loan.
Some loans come with penalties for early repayment or extra fees for accessing your own funds. Other loans can offer more flexibility, allowing you to make additional repayments without incurring charges. When comparing loans, it is vital that you read the fine print, or you can speak to us if you are unsure.
Refinancing costs
While refinancing may save you money in the long run, there may be other costs involved in the process, this can include application fees, legal fees, and property valuation fees. If you’re switching from a fixed-rate loan, keep an eye out for any break fees. These fees will depend on your lender and how much time is left on your fixed term.
Before deciding to refinance, it’s essential to calculate whether the potential savings from a lower interest rate will outweigh the costs associated with refinancing. In some cases, refinancing might make sense, but in others, the additional costs to switch could outweigh the benefits.
Your financial goals
Ultimately, refinancing should align with your broader financial goals, think about what you are trying to achieve in the short and long term. Are you looking to pay off your mortgage faster? Would you prefer to access extra funds for home improvements, debt consolidation, or an investment? Or perhaps you simply want to reduce your monthly repayments and make your finances a little easier to manage.
If you’re planning to stay in your home for many years, securing a lower interest rate and shortening your loan term could help you pay off your mortgage sooner and save on interest in the long run.
Refinancing is a big decision and it’s important to make sure it’s the right move for you. There’s no one-size-fits-all solution when it comes to mortgages, so it’s worth talking to us as we can help you navigate the process and explore your options.
For help and advice, reach out to our team here.
