Refinancing a home loan: Rates hit new lows
14 Apr 2020Coronavirus has delivered a financial blow to many homeowners. One way to potentially bring your costs down could be to refinance your loan, to take advantage of the lowest interest rates recorded in Australia’s history. Is now a good time to refinance? We take a look.
If you’ve lost your job, now is not the time to refinance, Canstar’s finance expert Steve Mickenbecker believes. However, if you are a “quality customer”, he notes it is possible that you could take advantage of some of the lowest interest rates banks have ever offered via refinancing.
How much could I save on my home if I refinanced to a lower rate?
Based on figures drawn from Canstar’s database of more than 100 lenders, refinancing a loan on the average variable interest rate of 3.52% to the lowest variable rate of 2.39% (comparison rate 2.40%) could save a typical borrower more than $240 a month, and more than $87,400 in interest over the life of the loan (based on a $400,000 loan over 30 years).
| Home Loan Health Check | ||||
| Rate Type | Rate | Monthly Repayment | Interest Cost
(Life of Loan) |
|
| Average Variable | 3.52% | $1,800.65 | $248,233.07 | |
| Lowest Variable* | 2.39% | $1,557.70 | $160,772.84 | |
| Difference | -1.13% | -$242.95 | -$87,460.23 | |
| Source: www.canstar.com.au – 06/04/2020 9:00 AM AEST. Based on owner-occupier variable loans available for the loan amount of $400,000, 80% LVR and with principal & interest repayments made over a total loan term of 30 years. Excludes introductory and first home buyer only loans. *At the time of writing, the lowest variable rate loan in Canstar’s database is Reduce Home Loans Rate Slasher loan, with a comparison rate of 2.40%. Comparison rate based on a loan amount of $150,000 over 25 years. | ||||
Would I be eligible to refinance my home loan during the coronavirus crisis?
While some banks are slowing or stopping taking loan enquiries from people who have never had a home loan before, refinancing so far seemed to be close to business as usual during this time of crisis, Mr Mickenbecker said.
Some banks were even reporting a lift in the number of Australians asking about swapping banks through refinancing, he said, as people moved to take advantage of record low interest rates.
“If you’ve lost your job, this is not a time to be refinancing,” he said. “The chances are that you probably wouldn’t qualify for a loan in any event. If you have lost your job, perhaps now is a good time to say to your lender that you want to take a repayment holiday for six months, which most banks are offering.
“However, if your hours have been reduced, it’s potentially a different story when it comes to refinancing because you are frankly joining about half the community – there are a lot of people in that boat at the moment. Because there are so many people in that situation, I suspect that the banks’ doors will not be closed to you. Lenders are showing all the indications that they do want quality business.”
But what is a “quality customer”? Mr Mickenbecker says that is borrowers who:
- Are in steady jobs
- Look to have reasonable job security (such as normal or reduced hours, as opposed to being stood down or retrenched)
- Are in control of their finances (meaning their income is adequate to cover typical household expenses)
- Have a healthy credit score
- Can demonstrate a good track record of repayments
- Have built up equity in their loan over time.
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“Lenders are showing that they want quality business, because interest rates are at record lows,” Mr Mickenbecker said. “They are out there competing for your business.”
He said if you did fit the banks’ quality criteria, “any time is a good time to refinance”.
“If you are on 80% of your usual income, you are probably looking for ways to cut down on household expenses, and the big-ticket items are very often financial expenses. It’s not groceries where you are likely to be able to find the big savings, but getting your home loan repayments and insurance premiums down. You can save a lot of money for not a lot of effort and you can do it without wandering the streets and exposing yourself to risk.”
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However, it seems some banks may be changing the rules when it comes to lending. ING recently issued a “Residential Update”, stating it was temporarily changing “underwriting guidelines” for residential mortgages, outlining stricter lending rules for applicants who were self-employed or working as a casual or contractor.
For owner-occupier and investment home loans, “applications that involve only casual employees or contractors will not be considered”, effective 15 April 2020.
“Where an application also involves a salaried employee, casual or contractor income can be assessed as secondary income,” the statement said.
“Income from self-employed borrowers involved in industries directly impacted by COVID-19 (e.g. airlines, tourism, hospitality, retail) will not be assessed for servicing purposes. The list of impacted industries is not exhaustive and each application will take into consideration individual circumstances.”
The comparison tables below display some of the fixed rate home loan products on Canstar’s database with links to lenders’ websites, for refinancing owner-occupiers in NSW making principal and interest repayments on a loan of $350,000 with an 80% LVR. Choose between the 1-year fixed, 3-year fixed and 5-year fixed tabs to view results most relevant to you. The results are sorted by ‘current rate’ (lowest to highest). Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
Lowest interest rates for 1-year fixed home loans
*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.
Lowest interest rates for 3-year fixed home loans
*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.
Lowest interest rates for 5-year fixed home loans
*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.
What should I be looking for in a home loan during the coronavirus crisis?
Mr Mickenbecker said while a low interest rate was always an attractive option for a home loan, there could be other loan features that also prove beneficial during this time of uncertainty.
“The average variable rate on Canstar’s database is 2.52% but the lowest rate is 2.39%, suggesting that consumers need to do their research when looking for a loan,” he said.
He said when looking for a loan, it could be a good idea to consider:
A low rate:
“Consumers should be looking for a loan that is below 3% – probably closer to 2.5% or below now,” he said.
Flexibility for the future:
“It could be a good idea to find a loan that allows some flexibility when it comes to repayments. That’s probably not top of mind at the moment, but a time will come when the world recovers from this emergency, and people will want to get ahead with their finances and make extra repayments so they can get that loan amount down. Features such as an offset account or the ability to redraw could assist with this.”
| Interest paid on a $300,000 loan over three years | |||||
| Product | Average Rate* | Monthly Repayment** | Amount owing after 3 years | Interest paid over 3 years | Amount repaid after 3 years |
| Variable | 3.64% | $1,370.69 | $282,503.82 | $31,848.59 | $17,496.18 |
| Variable with $20,000 in offset | 3.64% | $1,370.69 | $280,199.80 | $29,544.57 | $19,800.20 |
| Variable with $40,000 in offset | 3.64% | $1,370.69 | $277,895.78 | $27,240.55 | $22,104.22 |
| Source: www.canstar.com.au – 06/04/2020. *Average Rate based on owner- occupier variable loans that have a full offset account, with a loan amount of $300,000, 80% LVR, principal & interest repayments; excluding introductory and first home buyer-only loans. **Interest and repayment calculations assume a loan term of 30 years. | |||||
Total loan costs:
“Don’t forget to look at the big picture of the loan, such as how much the fees are and what interest rate may apply when any fixed-rate term expires,” Mr Mickenbecker suggested.
Coronavirus relief packages:
He said it may also serve consumers to be aware of what coronavirus relief packages the banks were offering – just in case.
How does a repayment pause work and what else is your bank offering?
“Talk of there being a waiting period for the relief packages just doesn’t make sense,” he said. “That defeats the purpose of those packages, which is to help keep people in their homes. Banks don’t want to see the housing market flooded with properties due to loan defaults, as it means prices will fall. So they are doing the right thing by their customers, which also happens to be the right thing by their shareholders.”
He said consumers need not be afraid of considering smaller, less well-known banks.
“Some people might be concerned about lenders they don’t know, but during times of crisis like this you don’t necessarily have to just go with big, well-known brands,” he said. “Smaller brands are regulated, too, in Australia either by APRA or ASIC – or both – and so that should give people confidence.”
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