How savvy borrowers can double the coming rate cuts

Refinancing has just become the hottest game in mortgage town.

Rates are finally down – just one teeny, token cut so far, but the Trump-induced economic instability has spiked expectations for more – and quickly.

We may be at the start of a refinancing frenzy, with more rate cuts on the way.Credit: Dominic Lorrimer

On Friday, big four bank ANZ brought forward its forecast for a reduction to next month, joining all the other big banks. It hasn’t even ruled out a double cut. Every one now expects three cuts this year, and four overall, with NAB tipping five.

But already savvy Aussies – who are, in fact, empowered by rate cuts to do so – are acting to cut their repayments further. More than half of borrowers on variable rates said they would consider refinancing to a lower rate lender following the first cash rate cut in over four years in February, a survey by comparison website Canstar found.

That we might be at the start of a refinancing frenzy is also borne out by data from PEXA, a mortgage settlement platform, which saw an 8.4 per cent jump in February compared with the same month last year.

And we should be … because the “DIY” discount available from ditching your current lender and switching to a better-value one can significantly add to your RBA-bestowed repayment savings. I’ll come back to just how much.

First, what do I mean by “empowered by rate cuts”? The vital thing to realise is that with each interest rate decrease, the amount you can borrow increases.

If you want to use the popular “home loan jail” parlance, which refers to being unable to get approved for a cheaper loan because rate rises have sucked up your spare income capacity and ludicrously trapped you in a more expensive one, the jail is getting unlocked.

Last week we saw a newly announced Coalition policy to reduce the stress test that’s applied to be approved for a new loan, from 300 basis points to 200 basis points. It’s a sensible, still-safe and easy move.

But it looks as though we will be effectively there – with a possible RBA reprieve of 100 basis points – soon anyway (assuming lenders pass this on in full, of course).

It’s also worth knowing that non-bank lenders – those not regulated by APRA – don’t have to apply the stress test. Here, approval is more discretionary. However, that might not end up your best option – the very lowest rates won’t come with an offset account. Or if a product says it does, it might not be a real one.

This is a true story: non-bank lenders cannot offer separate, “quarantined” offset accounts unless they are APRA-regulated, authorised deposit-taking institutions.

The problem with opting for one that is not is threefold: it is not eligible for the Australian Government Deposit Guarantee of $250,000; your money goes into your loan’s general repayment “pool” and can be locked up by a lender if you get into financial strife; and your loan balance falls with every deposit, meaning you would never be able to claim investment property tax deductions for that amount, if you later decided to rent out your current home. All of that is a pretty big deal.

What about those lenders with real offset accounts? There’s been some movement at the top … or more accurately, bottom.

Pipping the rest of the pack is the Bank of China with 5.68 per cent. You can snare 5.74 per cent from The Capricornian, Tiimely Home, Police Credit Union and Northern Inland Credit Union.

These rates are for owner-occupiers paying principal and interest, and based on a home loan value of $500,000 with a loan to valuation ratio of 80 per cent or less.

And data house Mozo tells me that in those circumstances, the average alternative big four loan is way up at 6.7 per cent … or roughly 100 basis points more. Looking at that another way, it’s like getting four rate cuts – today.

And four potential official cuts are opening up access to these further unofficial instant ones. Even just the repayment saving from a switch at today’s rates, on our model $500,000 mortgage, would be $315 a month.

Nicole Pedersen-McKinnon is author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.

• Advice given is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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