Should You Refinance Your Mortgage or Not? That’s the $19 Billion Question

Amidst the cost of living crisis and the mortgage squeeze from our ever-rising interest rates, millions of Aussies are choosing to refinance their home loans to try and get a better deal.

All four of the big banks have continually passed successive interest rate rises from the Reserve Bank of Australia (RBA). Moreover, on September 6, the RBA raised said rates for the fifth time in a row. These folks have bumped the cash rate target up by 50 basis points to 2.35 percent and raised the interest rate by 50 basis points to 2.25 percent. If you have a mortgage, the amount you’ll now be paying is going to probably increase by an ouch-worthy amount. To make this matter worse, there’s little to suggest that this tango won’t continue.

A recent Finder survey of homeowners revealed that almost 1-in-5 Australian mortgage holders (18%) have refinanced their home loan in the past six months. The same proportion (18%) say they plan to do so in the coming six months.

The total value of refinanced loans reached a record high $19 billion in May – an increase of 20% over the year, according to Finder analysis of the latest Australian Bureau of Statistics (ABS) data released last week.

Sarah Megginson, senior editor of money at Finder, said in a statement that it was now too late to get a better deal on a home loan as most fixed interest rates are now above 5%.

“For some, it’s a case of refinance or default on their debt,” she said.

“Households are in a very precarious position right now struggling with the worst cost of living crisis in decades.”

Even more concerning is the fact that, according to Finder, 17% of mortgage holders “have no idea” what their current home loan interest rate is. A further 45% only have a general idea what interest rate they are paying.

If you are considering refinancing, the practice can be a fairly straightforward one, however whether or not it’s the right decision for you largely comes down to your own personal circumstances. Here’s what you need to think about.

Refinancing Your Home

Refinancing, in case you weren’t aware, basically means taking out an additional mortgage on your house in order to help pay for an existing one. Typically, this is done with a new lender, although it doesn’t have to be, and usually during periods of low interest to take advantage of better offers.

There are a number of options available to you here, which all come under the umbrella of ‘refinancing’. While the present market may not offer a huge range of benefits, if your credit score has improved since your last loan, you might be offered a better deal. You can also cash out existing equity in your current home to get the money back. Moving from an adjustable rate to a fixed one is also an option, although now is probably not the time to do that. It’s also possible to change the terms of your loan, shortening it or lengthening it to adjust monthly payments.

One thing to be careful of here is upfront costs in switching and penalties for late payment. Both of these can make an initially attractive option less economic in the long run.

Refinancing is fairly similar to getting your first home loan. Shopping around for deals and comparing these with your existing loan is the first place to start. Megginson says that there are still good options out there.

“There’s still a lot of competition in the home loan market and you could save hundreds every month by moving to a lender with a cheaper rate,” she said.

Tools like Finder’s refinancing comparison search are useful here, as is Canstar’s refinance home loan comparison and RateCity’s similar tool.

If defaulting on your mortgage is something you’re worried about, Megginson argues that it’s better to take action now than wait until it gets too much.

“There’s not likely to be any reprieve for the next couple of years,” she said.

“Homeowners need to take action immediately if they don’t think they will be able to meet their mortgage repayments.

“If you’re in financial trouble and you think you’ll struggle making repayments at these higher amounts, contact your bank — you might be eligible for a repayment holiday, an interest-only period or a hardship repayment plan,” Megginson said.

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