- Buyers left home a-loan as interest rates continue to rise
- Refinancing could save borrowers hundreds per month
- Switching loans can also have its downsides
The official interest rate rose for the tenth consecutive month in March 2023 to 3.6%.
With that, borrowing power dwindled and Australians are paying hundreds more per month in repayments as the cash rate increases are passed on by the banks.
Earlier this year, Canstar data showed borrowing power for a couple earning over $180,000 per year saw borrowing power slashed from $1.3 million to $960,000 for an official cash rate of 3.6%. More here.
February data from Mozo showed that the ninth rate rise earlier this year left borrowers on a $500,000 loan over $11,000 worse off.
Concerns are also growing that home loan borrowers will breach their serviceability buffer, with one big four Australian bank finding almost half of its home loans were taken based on interest rate buffers that are set to be exceeded as the interest rate hikes continue.
Cheaper loans are a dime a dozen
Canstar data shows that almost one in four (24%) of principal and interest variable rate loans for owner occupiers are priced at an interest rate over 6.5%.
To put that in perspective, Canstar said the lowest variable rate loan is 4.69%, meaning one in four rates are 1.81 percentage points above the cheapest loan or at least 40% higher than the lowest rate loan; that higher loan could mean a borrower on a $500,000 over 30 years could be paying $570 or more each month.
Looking for a better home loan deal
Canstar’s finance expert, Steve Mickenbecker said: “For borrowers still in sound enough financial shape to refinance, an interest rate above 6.50% should be blaring alarm bells and sending them off to a bank for a better deal.”
“There are 57 variable rate loans at present with rates under 5% and while refinancing to lowest rate loan in the market may not always be possible, there’s still a wide range of loans offering big savings.”
Canstar has mapped the interest rate distribution of owner-occupied home loans to show the number of interest rates in different bands. Using the midpoint of each tier as a basis, the research shows the potential savings for borrowers from switching.
Owner-occupied home loan interest rate bands
|
Rate Range
|
Number of Rates
|
Mid-Point
|
Monthly Repayment
|
Monthly Savings From Moving to Lowest Mid-Point Rate of 4.75%
|
|
4.51% – 5.00%
|
57
|
4.75%
|
$2,608
|
–
|
|
5.01% – 5.50%
|
193
|
5.25%
|
$2,761
|
$153
|
|
5.51% – 6.00%
|
116
|
5.75%
|
$2,918
|
$310
|
|
6.01% – 6.50%
|
102
|
6.25%
|
$3,079
|
$471
|
|
6.51% – 7.00%
|
54
|
6.75%
|
$3,243
|
$635
|
|
7.01% – 7.50%
|
33
|
7.25%
|
$3,411
|
$803
|
|
7.51% – 8.00%
|
36
|
7.75%
|
$3,582
|
$974
|
|
8.01% – above
|
23
|
8.25%
|
$3,756
|
$1,148
|
Source: Canstar – 20/03/2023. Based on owner-occupier variable loans on Canstar’s database, available for $500,000, any LVR and P&I repayments; excluding first home buyer-only and green-only loans. Monthly repayments are calculated based on a $500,000 loan repaid over 30 years.
Mickenbecker added: “The case for refinancing is even more compelling for borrowers with high-rate loans taken out many years ago that are now breaching 8%, with savings potentially reaching close to $1,150 a month on a $500,000 loan, which is a severe penalty for complacency,” says Mickenbecker.
“Even for borrowers with rates in the mid-range of 6.01% to 6.50%, the savings are still a very substantial $471 per month. Try saving that on any other household bill. For borrowers, the home loan is the biggest opportunity for savings to help make ends meet.”
“If borrowers can cut 2% from their loan by refinancing, they are clawing back more than half of the Reserve Bank interest rate increases of the past year.”
Earlier this year, the Australian Bureau of Statistics (ABS) Lending Indicators found that the number of Australians who refinanced their home loans was at its second highest ever rate in December 2022.
What you need to know about refinancing
The Property Tribune contributor and CEO of Harken Finance, Harry Bozin, wrote in 2021:
“Reviewing your home loan every year or two is a good habit to get into.”
Harry Bozin, CEO, Harken Finance
Bozin noted while your home loan may have been right for you before, changing market conditions and personal circumstances mean it may no longer suit you now.
The obvious reason for refinancing is of course lower rates and fees, but Bozin noted that it is not all about interest rates: “Sometimes the loans with the lowest rates also sacrifice features that are not only more convenient but also save you money in the long run.”
Examples included: offset accounts, flexible payments, redraw, flexible rates, and more.
Refinancing also comes with a cost.
Bozin wrote: “An important matter to consider is the cost(s) involved in ending one loan and moving to another. Only with an appreciation of this can you weigh up the benefits of switching home loans.
“The best way to do this is to speak with your broker or bank,” said Bozin, with possible fees and costs including discharge fee, break cost, application fee, valuation fee, early exit fees, settlement fee, registration fee, lender’s mortgage insurance, and more.
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