Prepare for a shock. Those enjoying historically low interest rates may soon face the full impact of 10 RBA cash rate hikes, as a staggering $141 billion in fixed-rate home loans are set to expire and revert to much higher variable rates. As rates increase, it is important to consider whether refinancing your home loan could be a smart financial move. Here are some tips and insights, provided by our experienced brokers, to help you make informed decisions in this changing interest-rate environment.
1. Ensure That The Benefit Is Higher Than The Costs
Refinancing typically involves paying closing costs and other fees, so it is essential to ensure that the savings you’ll realise from a lower interest rate and other favourable terms are enough to justify the expenses.
Calculating your break-even point is one way to assess whether the benefit outweighs the cost. This is the point at which the savings from refinancing equals the fees you paid to refinance. To calculate this figure, use this formula:
For example, assume your total refinancing costs are $1800 and you reduce your monthly mortgage repayment by $150 with the new interest rate. In this case, your break-even point will be 12 months (1800/150). This means that it would take 12 months of making lower mortgage repayments to recoup the costs of refinancing.
After the break-even point, you see the actual savings from refinancing. If you plan to stay in your home beyond your break-even point, refinancing may well be a good decision, as you’ll be able to take advantage of the savings for the remaining term of your mortgage.
2. Refinance Multiple Properties To One Lender With Cashback Incentives
Some lenders offer cashback per security, so refinancing multiple properties to one lender may be a good option. Besides the potential cashback incentives, consolidating your loans with one lender can lead to cost savings, such as lower interest rates and reduced fees. Additionally, managing multiple loans can be a hassle and having them all in one place can streamline the process and make it more convenient for you.
Again, make sure you carefully consider the costs and benefits of this option. It would be best to compare the costs and benefits of refinancing each property individually versus refinancing them as a package to determine which option makes the most sense for your financial goals.
It is important to note that refinancing multiple properties to one lender may involve a more complex application process and may require additional documentation and verification of your income, assets and liabilities. So, it is highly recommended that you work with a knowledgeable broker or financial adviser who can help you navigate the process and ensure that you make the best decision.
Get personalised insights and assistance with your refinancing needs from our expert brokers. Call us at 1300 889 743 or fill out our free online assessment form and we’ll contact you
3. Be Cautious When Choosing A Long-Term Fixed Rate
Choose a long-term fixed-rate loan wisely – it’s not always the best option. Consider your personal circumstances before making a decision.
When to Avoid a Long-Term Fixed-Rate Loan
- If interest rates are already high: You may end up paying a higher interest rate than on the current variable-rate loan for much of your fixed term.
- If you plan to sell your property soon: You may have to pay the break costs or exit fees if you end your fixed term early.
- If you want special features: Fixed-rate loans rarely have special features such as offset accounts or redraw facilities, which may not suit your needs if you need flexibility in your loan.
4. Consider Future Rate Rises Where Possible
With rates expected to rise more, it’s essential to know what economists say about the increases and the cash rate situation. The RBA’s decision to increase, decrease or maintain the cash rate is based on the state of the economy. Keep track of factors that influence the RBA’s monetary policy. Experts’ advice and insights are valuable resources but exercise caution and make decisions based on your financial circumstances.
Ways to manage this risk of interest-rate change include opting for a fixed rate or choosing a variable-rate loan with a rate lock feature that allows you to fix the rate for some time.
Use our interest rate rise calculator to estimate the impact of potential rate hikes on your repayments.
By being proactive and taking steps to manage the risk of rising interest rates, you can minimise the impact on your mortgage repayments and maintain your financial stability over the long term.
5. Maintain A Clean History And Make Timely Repayments
Most lenders will review your credit history as part of the refinance process. A poor credit history can hurt your chances of getting approved for a new loan or favourable interest rates.
To maintain a clean credit history, it is important to pay your bills on time. Avoid overextending your credit and submitting too many credit applications. Additionally, regularly reviewing your credit report can help identify any errors or fraudulent activities that may be affecting your credit score.
Apart from evaluating your credit history, lenders will also assess your income, expenses, employment history and property value when determining how good a deal to give you. Maintaining a stable income and a healthy debt-to-income ratio can also have a positive impact on your loan eligibility and borrowing capacity.
6. Opt For A Shorter Term And Higher Repayments If Possible
It’s worth considering shorter loan terms even if they result in higher interest rates. A shorter term means you pay less interest over the life of the loan. You can also consider selecting a long loan term but making extra repayments. This can also help you pay off your loan faster and save money on interest. Paying more than the minimum also allows you to build equity in your home more quickly. If you are interested in this option, make sure you refinance to a loan that allows extra repayments without penalties.
Want to know more about refinancing? Learn more on our Refinance Your Home Loan | Everything You Need To Know page.
We’ll Make Refinancing Easy For You!
Don’t feel daunted by refinancing. Today, technology makes it easier than ever. Less paperwork is necessary, and if you owe less than 80% of the property value, some lenders will do an online valuation of your property, so it’s relatively simple.
Let our experienced team assist you with refinancing! We’ll work closely with you to understand your unique needs and financial goals. Contact us today at 1300 889 743 for personalised guidance and expert advice on refinancing options tailored to your specific situation. You can also fill out our free online assessment form to get started.