Mortgage refinancing can save borrowers thousands of dollars

Six interest rate rises in six months are pressuring many households, sparking a refinancing hunt for more home loan savings.

A refinancing rush in Australia is expected to continue as borrowers hunt for lower mortgage interest rates, but some will miss out because of harsher loan serviceability requirements.

Mortgage specialists say borrowers can partially protect themselves from Reserve Bank rate rises by switching to a new lender or negotiating with their own home loan provider.

Refinancing reached a record $18.9 billion in August, according to the Australian Bureau of Statistics, up 5.3 per cent in a month, and RateCity.com.au research director Sally Tindall said the strength should continue as more borrowers looked for ways to combat rising rates.

However, many customers may find refinancing difficult because of falling property prices and 2.5 per cent of official interest rate rises since May.

The Reserve Bank warned on Friday that Australians’ income growth had not kept up with inflation, “leaving households with less capacity to service their debts”. It said debt challenges could become more widespread.

RateCity’s Sally Tindall says borrowers should compare apples with apples. Picture: Tim Hunter.

“Some borrowers could find themselves in mortgage prison because they don’t pass the bank’s serviceability test or they don’t have enough equity in their loan,” Ms Tindall said.

“If you’re considering refinancing, your first call should be to your current lender to ask if they can offer you a better deal.

“Many lenders reserve their best rates for new customers, not existing ones.”

Finance Brokers Association of Australia managing director Peter White said borrowers should understand that lenders examined discretionary spending when assessing creditworthiness, so now might not be the time to spend up.

“Be aware that lenders will assess you not at the current rate, but at a rate approximately 3 per cent higher, as they take future rises into consideration,” he said.

This meant people must be able to meet repayments at least 5-7 per cent above the rate at which they were approved when they took out their mortgage, Mr White said.

Canstar group executive financial services Steve Mickenbecker said refinancing into a lower-rate loan would insulate borrowers from some future RBA rate rises.

“Maintaining repayments at their current level, higher than required on the new loan, will build a buffer for times that are looking likely to get tougher,” he said.

“The bargains are not as generous for refinancers as they were at the start of the year, but the margin between the better rates available and the mediocrity of average rates is just as wide.

Canstar’s Steve Mickenbecker recommends building a buffer for tougher times ahead.

Mr Mickenbecker said borrowers should do their homework on competitors’ mortgage offerings before approaching their lender.

“This demonstrates to the bank that you are not just a tyre-kicker, but a serious flight risk,” he said.

“If you have had your loan for five years or more and have never renegotiated a better deal with your lender, almost certainly you are paying too much interest, and by quite a margin.”

RateCity’s Ms Tindall said when comparing rates, make sure the latest round of RBA rises were factored in.

“With six rate hikes under our belts and likely more waiting in the wings, it can be tricky to keep track of what’s a good rate – you want to be comparing apples with apples,” she said.

Borrowers should try to avoid extending their loan back out to 30 years, as this could potentially cost them tens of thousands of dollars in extra interest, Ms Tindall said.

FIVE WAYS TO GET A BETTER DEAL

1 Check your finances and credit score, fix flaws and make yourself an attractive customer.

2 Cut your discretionary spending – lenders look at this when assessing loans.

3 Talk to your existing lender and be ready to reference well-priced loans to support your negotiation.

4 Be prepared to walk, and know the costs and perks relating to the new lender.

5 Ask the new lender to waive upfront frees – many are willing to negotiate to get you to switch.

Source: RateCity, Canstar

Originally published as Mortgage refinancing can save borrowers thousands of dollars