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Refinancing now more worthwhile than ever

14/11/2011

While always a worthwhile consideration for mortgage holders, refinancing has become even more attractive in recent months in light of the fierce competition between lenders to grow their market share.

According to Smartline Personal Mortgage Advisers’ Managing Director, Chris Acret, lenders have “pulled out all stops” to encourage potential customers to take out a home loan with them, removing many of the obstacles to refinancing.  

“There’s no doubt that there are some great offers currently available, which make refinancing more appealing for a larger number of people with a home loan,” Mr Acret said.

While there are numerous aspects of a home loan to consider, the interest rate is a key focus for many people. While the RBA has announced a cut to the cash rate this week, lenders have been lowering their fixed home loan rates for the past couple of months.

“While much of the public and media focus has been on the RBA’s deliberations each month, fixed home loan rates have been considerably reduced of late and are now significantly lower than variable rates, making them extremely attractive for those suited to a fixed home loan,” Mr Acret said.

“In the current environment it’s not uncommon to see fixed rates that are at least 0.5% lower than a good variable rate, which equates to a saving of about $1500 per year on a $300,000 loan.

“In light of this, a good strategy for an owner-occupier might be to split the loan.  For example, clients can choose to fix part of the loan to capitalise on the great interest rate and know what future repayments will be for a set term, and put the other portion into a variable loan which offers the flexibility of additional repayments, redraw or offset, and the like.

“For investors looking for certainty with managing their property’s cash flow, it may be a good option to consider fixing the entire loan.

“Some lenders are also prepared to significantly reduce their interest rate to attract customers with large loans. It’s not unusual to see a reduction of a full 1% on the standard variable rate for a large loan, say $500,000-plus, where previously they might have offered a 0.7% reduction.”

Refinancing is currently even more attractive as a result of the other ‘sweeteners’ that many lenders are offering to attract new customers.

This includes waiving or significantly reducing application fees (generally around $600) or discounting annual fees on professional packages.

Some lenders are offering up to a $1000 to help cover the costs associated with leaving their existing bank, which is in addition to the abolishment of exit fees that came into effect from 1 July this year.

However, those clients who are currently on a fixed rate should check with their mortgage adviser before looking for a new loan. Refinancing is still worth investigating, but it may be that the costs of breaking out of the fixed loan negate all the benefits and it may be best to wait until the fixed term is up.

“But for those not in a fixed loan, all in all, it makes for a pretty compelling argument – a good interest rate, no upfront costs and in some cases, fees to leave your existing lender paid for by your new lender,” Mr Acret said. “It removes many of the barriers to refinancing.”

Refinancing has always been an appealing option when consolidating other debts such as credit cards, car loans or store cards, which all have significantly higher interest rates. Now it’s even more even more attractive and a good mortgage adviser will consider all the options in this respect.

Mr Acret stressed that those considering refinancing shouldn’t be focused just on the interest rate.

“It’s important not to be a rate chaser as there’s so much more to a home loan than the rate – the correct structuring based on your individual circumstances is also critical,” he said.

“You need to do your numbers carefully to ensure that refinancing will improve your overall financial position for the long-term. This is not something you should be doing every 12 or 18 months – done properly refinancing should ideally set you right for the next three to five years.

“That’s why working with a mortgage adviser will ensure that you make the move for the right reasons and that you fully maximise the associated benefits.”

As always, talk to your Smartline Personal Mortgage Adviser for more information.

 

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