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Brendan Coates

Brendan Coates

Home loan customers urged now is the time to refinance

Home owners are being urged to refinance after lenders sliced fixed rates to a fraction above 2 per cent.

The banks made cuts in response to the Reserve Bank’s decision to drop the official cash rate to a record low 0.25 per cent.

And with the RBA ruling out the possibility of zero or negative interest rates, analysts believe home loan costs are close to “rock bottom”.

Canstar financial services executive Steve Mickenbecker saidhome owners should strike now to capitalise on current market conditions.

“There’s a real opportunity because rates are now at record lows, and even if there’s another fall, it’s not going to be significant,” Mr Mickenbecker said.

“Home owners with a mortgage for 10 years or more are conditioned to average rates of 3.6 per cent, so if you can lock in year-round repayments that are one per cent lower, you’re saving $200 a month.”

What’s on offer?

Of the majors, ANZ provides the lowest owner-occupier variable interest rate. It charges 2.72 per cent on its Simplicity PLUS Home Loan (with discounts applied).

Commonwealth Bank is offering 2.79 per cent on its Extra Home Loans (with loan-to-value ratios of up to 80 per cent), while NAB (2.84 per cent) and Westpac (2.93 per cent) sit slightly further behind.

The big four also passed on the RBA’s rate cuts in their fixed-rate options – each lender’s two-year and three-year fixed loans now sit at either 2.19 or 2.29 per cent.

However, the lowest rates charged by the country’s largest lenders are noticeably higher than options presented by many smaller firms.

According to RateCity.com.au, Reduce Home Loan’s Rate Slasher owner-occupier rate of 2.39 per cent is among the lowest on the market, followed closely by Homestar Finance and Well Home Loans.

RateCity.com.au research director Sally Tindall said although further rate cuts from Australia’s central bank are off the cards, fierce competition in the home loan market could drive rates fractionally lower.

That’s welcome news for those shopping around.

“Lenders big and small are hungry for new business, and as a result, there are now really competitive rates across the board – not just from the smaller lenders, but also from the big banks,” Ms Tindall said.

“But the RBA has found that new customers are typically offered lower rates than existing customers.

“So if you are on a variable rate and have got a good track record of paying down your debt and [have] built up equity, then you are in the driver’s seat to turn yourself into a new customer and nab a better deal.”

What should I know before negotiating a new deal?

With ABS figures revealing more than 780,000 jobs were lost in the first three weeks of the lockdown, Ms Tindall said retrenched home owners are better off renegotiating with the same institution.

However, those with stable job security need to weigh up the benefits of fixed rates with the flexibility offered by variable loans.

“Some people like the idea of fixing their rate because they like the certainty of knowing exactly how much their monthly mortgage repayments will cost,” Ms Tindall said.

“But despite the record-low rates we’re seeing, fixed rates are typically less flexible.

“They typically don’t come with an offset account, there is normally a cap on extra repayments and if you need to break your loan, there can be a costly break fee.”

Brokers say fixing your mortgage when you think rates have hit their trough is a bit like “betting against the house”.

Mr Mickenbecker said comparison websites can help prospective refinancers make sense of the hundreds of loans on offer and find a deal suited to their individual financial situation.

And although borrowers may be enticed by small discounts from their current lender, thorough research could lead to a better deal elsewhere.

“Don’t necessarily take the first offer if you’re renegotiating with your current bank, which may offer 0.25 per cent off your current rate,” Mr Mickenbecker said.

“Know what’s available, know what rates you can get and demonstrate very clearly that you have done your homework on the market and are not bluffing when you say you may refinance with another lender.”