The rate debate: homeowners can cut costs by switching lenders

The market has just seen another all-time high in loan refinancing – no wonder when home loan borrowers and investors can still pay a lot less with a switch.

Saving on home loan interest costs is one of the quickest ways to increase your disposable income, and it’s clear more and more Australians with home mortgages are thinking that way.

One of the key principles of successful investing is controlling the costs that you pay.

Costs are actually the only thing that you can control, wherever you choose to invest.

The lower your overall costs, the more money that you ultimately get to keep in your pocket.

There’s probably no other investment segment where it’s easier to track how people are responding to costs than the residential property market.

Saving on home loan interest costs is one of the quickest ways to increase your disposable income, and it’s clear more and more Australians with home mortgages are thinking that way.

Just-released Australian Bureau of Statistics data shows home borrowers are continuing to take advantage of ultra-low interest rates and cutting their loan repayment costs in record numbers.

It’s clear many people are doing this by switching lenders, or as the ABS refers to it, through external refinancing.

The ABS’s latest seasonally adjusted data for August shows the total value of external refinancing for housing across Australia rose 3.2 per cent to reach an all-time monthly high of $17.8bn.

The August refinancing figure compared with $17.2bn in July (the previous monthly record) and just under $16.2bn recorded in June.  External refinancing for owner-occupied housing did dip very slightly in August to $11.2bn, from a record $11.3bn the month before.

But over the same month, external refinancing of investor housing loans rose 11.5 per cent to $6.5bn, from $5.8bn in July.

Keep in mind that the ABS’s external refinancing data doesn’t include people who have secured a lower rate from their existing lender by asking for a better deal.

It’s likely many people are doing that because it’s generally the easiest and quickest way to reduce your mortgage rate and avoids lengthy loan application processes.

Yet the record level of switching activity also probably indicates that, for various reasons, some of the low-rate lending deals on offer aren’t being matched across the board. So far this year residential property borrowers have collectively switched around $118bn of loans from their existing lender to another lender.

If nothing else, that’s a sure sign that many Australians are being proactive about reducing their costs.

On a long-term property loan, what may seem to be only a small difference in the interest rate charged will really add up over time.

The increase in refinancing activity also demonstrates that market competition between mortgage lenders remains fierce.

The value of refinancing between lenders is 60 per cent higher than it was a year ago, with many mortgage rates on offer for both variable and shorter-term fixed loans now sitting comfortably below 2 per cent per annum.

Data provided by financial comparison website Canstar shows there are now 61 home loan providers in Australia offering interest rates below 2 per cent on more than 200 fixed and variable rate mortgage products. That compares with eight providers a year ago and just 18 products.

On a $500,000 owner-occupier principal and interest loan taken over 25 years, a borrower can expect to pay about $2200 per month at the current average interest rate of 2.32 per cent.

Just reducing from the average interest rate down to 2 per cent would cut repayments by about $80 per month to $2120.

At 1.85 per cent, the lowest advertised rate currently available, the saving would be more than $100 per month assuming the loan has no ongoing monthly costs.

That’s around $1200 per year in additional income to use elsewhere, including for other investments.

In a nutshell, whether you’re paying off your home or an investment property loan, investing in managed funds for retirement, or just wanting to create more disposable income for other purposes, controlling what you’re paying in costs should always be a key consideration.

Controlling costs is important and shouldn’t be considered a one-off exercise either.

Common sense tells us that while investment performance varies over time, costs are ongoing and will have a long-lasting impact on your total returns.

Tony Kaye is senior personal finance writer with Vanguard.

www.vanguard.com