Rates have been tipped to rise in February prompting many to consider refinancing.
If your New Year’s resolution is to save money on your home loan, the odds could now be stacked against you. Canstar data shows at least 34 lenders have hiked fixed rates over the past month – an ominous sign that the RBA could bring the cash rate up as soon as February.
Which begs the question – if you are looking to refinance, when is the right time – and is it better to act now or after an interest rate rise?
It’s hard to know how much you will save by refinancing if rates will likely rise.
CAN YOU AFFORD TO REFINANCE AFTER A RATE HIKE?
One important thing refinancers should consider is borrowing power, says Two Red Shoes founder and mortgage broker Rebecca Jarrett-Dalton.
“When the cash rate goes up, so does the assessment rate that you get tested at,” she says. “So the affordability goes down.”
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Lenders usually add about three percentage points onto the advertised interest rate during the assessment process in order to make sure the prospective borrower can withstand any future rate hikes should they occur. For those borrowers already finding it tough, an extra 25 basis points could prove challenging, she says.
Two Red Shoes founder and broker Rebecca Jarrett-Dalton.
HOW MUCH WILL YOU SAVE?
On the other hand, it might be better to wait until the RBA has made their move so you know exactly what your savings will be, says First Choice Mortgage Brokers director Tony Bice.
“If you refinance before a rate hike you may fall into a false sense of security by taking out a rate with a new lender, who will, in turn, increase its rate after the Reserve Bank announces its cash rate increase,” he says. “A lot of the time you’re better off to let the dust settle and do the correct numbers.”
First Choice Mortgage Brokers director Tony Bice.
TIME IS MONEY
According to Canstar data insights director Sally Tindall, the ideal time to refinance is “yesterday.”
“Banks calculate how much interest you owe on a daily basis, so the sooner you switch to a better deal, the faster you’ll start benefiting financially from this,” she says. “Refinancing now can help soften the impact of a couple of rate hikes, or even negate them altogether if you can secure a decent cut.”
Canstar Data Insights director Sally Tindall. Picture: supplied
She gives the example of an owner-occupier with a $600,000 debt and 25 years remaining on a rate of 6 per cent who switches to a rate of 5.25 per cent in February.
“Their minimum monthly mortgage repayments would drop by $270,” she says. “Over the next two years, they could potentially save $7,828, even after factoring in $1,150 in switch costs and a potential rate hike.
“If the RBA then increases the cash rate and banks pass the hike on to their variable customers, the borrower would still be paying $182 a month less than what they were at the start of the year before they had refinanced.”
If you are paying a comparatively high rate, you could still save big by refinancing before a hike.
THINGS TO CONSIDER WHEN REFINANCING
It’s important to remember that refinancing takes time and quite a bit of documentation, Bice says, including the valuation of your property and the scrutiny of the loan assessment.
The cost of refinancing should also be taken into account. Jarrett-Dalton says while it depends on the intention and goal of each client, she prefers not to refinance someone unless they will save at least double the cost in the first year.
Tindall warns against re-extending the loan term to keep repayments down since doing so adds extra interest onto the loan.
There’s much anticipation around what will happen to the cash rate in February. Picture: NewsWire / Nikki Short
HOW LENDERS ACT AFTER AN RBA HIKE
There is often an increase in refinancing on the back of RBA rate changes, Tindall says.
“Banks are well aware of this and are at the ready to welcome refinancers through the door,” she says.
Some lenders may also work harder to prevent losing customers to refinancing via their retention teams, says Bice.
While lenders generally pass on RBA hikes in full, there are usually still some good deals to be had, Jarrett-Dalton says.
How will lenders respond to an RBA rate hike? Picture: William WEST / AFP
“There will be a degree of competition,” she says. “The ones who are able to offer more competition are the ones who are offering lending off money that has been deposited with them versus those that are having to go to market.”
Bice says lenders may look for other ways to increase their market share while maintaining “rate parity”, such as cash backs or special offers for existing clients.
He says it’s worth trying to get a sharper rate with your existing lender before an RBA hike to try and soften any future rate pain.
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