Peering over a mortgage cliff? Here’s how to refinance your home loan

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Two years ago, or approximately three aeons in COVID time, Australian homeowners were treated to one of the best refinancing environments in recent memory.

Interest rates were at bargain-basement levels of 2-3 per cent, even for fixed-rate loans, and banks were handing out comically large stacks of cash in an attempt to woo new customers. It was the best of times, but, as Nelly Furtado once said, all good things come to an end.

Refinancing your home loan can save you some money, but there are a few important things to remember when you begin the process.Credit: Aresna Villanueva

These days, refinancing is much less fun. Average interest rates are sitting at about 6.3 per cent, even for fixed rates, and banks aren’t as liberal with the stacks of cash. To make matters worse, many of us who took advantage of the halcyon days of low rates and fixed our loans are now seeing those loans end, and are faced with the infamous “mortgage cliff”.

What’s the problem?

The rising cost of living also means Australians are scrounging for savings wherever they can find them, and with our mortgages being one of the biggest expenses affecting our bottom lines, there’s no wonder we’re all rushing to refinance. According to the Australian Bureau of Statistics, $20.2 billion worth of home loans were refinanced in June, a slight drop from the month prior but still at record highs.

What you can do about it

If you’re someone peering over the mortgage cliff, or just looking to save some money each month, here are some tips on how to best manage the process.

• Get on the blower: Before you start hitting up Google and sussing out rates at other banks, it’s worth picking up the phone and calling your current bank, says Samuel Philipos, managing director at Open Home Loans. “What we’re seeing with the big banks at the moment is that they’ve got more flexibility with giving you more competitive offers to stay with them,” he says. On average, Philipos says refinancing should save you $2000 a year, so use that as your benchmark when considering a new offer from your bank.

• Beware the perks: We all like getting big piles of cash, but enticing offers from lenders can sometimes be too good to be true warns Sally Tindall, research director at RateCity. “Upfront perks offered by banks to tempt you to switch can seem like a white knight, but they have the potential to sting you in the long run if the ongoing interest rate isn’t competitive,” she says. These perks can come in the form of temporary rate discounts, frequent flyer points and those big piles of cash. “Do the maths, and seriously consider about how regularly you are likely to refinance, to see which one is likely to put you ahead.”

• Don’t extend your loan term: While it can be tempting to extend your loan back out to 30 years when you refinance to lower your payments, try to avoid this where possible, Tindall says. “If you’re five years into a 30-year loan term, then ask your new lender for a 25-year loan term (or shorter),” she says. “Keeping your loan for an extra five years has the potential to cost you thousands of dollars extra in the long run.”

• Actively manage your mortgage: You may have heard of actively managed investments, but most of us tend to be more passive when it comes to our home loans. This can leave you paying more than you need to, Philipos says, and he advises checking in on your mortgage every three months. “It’s not about how often you switch, but how much you could be missing out on,” he says. “Every three months, quickly shop around, negotiate with your bank, and see what the difference is. If it hits the tipping point, then switch.”

• Keep an eye on the costs: It costs an average of $1000 to refinance, so factor that in when you’re negotiating. Some banks will waive certain refinancing fees if you ask, so make sure you do.

Advice given in this article 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.