Let's take a closer look how this is possible.
In September The Reserve Bank of Australia (RBA) announced another hike to the cash rate from 1.85% to 2.35%. This takes the total increase in the cash rate this year to 2.25 percentage points, up from a record-low of 0.1% in May.
With this increase, we have seen home loan interest rates increase across the board for both fixed and variable rates. If you currently have a variable-rate loan no doubt you will already have felt the hit to your hip pocket, but there are options available to help save money.
How much of a difference could lowering your interest rate make?
Let’s look at two loan amounts as an example below.
From May until August, homeowners on variable-rate loans could have seen interest rate hikes of around 1.75 percentage points, depending on their loan. What does this look like in repayments?
If you had a $500,000 loan with monthly principal and interest repayments over a 30-year term and your interest rate increased from 3% p.a. to 4.75% p.a., your repayments would have increased from $2,108 to $2,608 - an increase of $500. If that loan was $1 million, repayments would have increased from $4,216 to $5,216 - an increase of $1,000.
So what difference can negotiating a lower interest rate make to your repayments?
Decreasing interest rates from 4.75% p.a. to 4.5% p.a. would reduce monthly repayments by:
$500,000 loan: $75
$1 million loan: $149
Decreasing interest rates from 4.75% p.a. to 4.25% p.a. would reduce monthly repayments by:
$500,000 loan: $148
$1 million loan: $297
When your finance broker looks for a better interest rate, there are a number of ways they can go about it. First, they can look to negotiate with your current lender. Alternatively, they can look at the broader market at over 60 banks and secure lenders to see if you could be better served elsewhere. This is repricing or refinancing.
Refinancing Vs Repricing.
When we negotiate with your current lender to get you on a better deal, that is called repricing. This can be a straightforward process and your interest rate or fees change, but the lender remains the same.
If we find you a better deal with a different lender and move you across, it is called refinancing. Many lenders offer lower interest rates to new customers, and/or cashback incentives where they offer money for you to move your loan to them. This will need to be weighed up with any potential fees charged in the change, so your broker can run a detailed calculation for you and let you know if it would be beneficial for you over the longer term.
Beyond interest rates
Another thing to keep in mind is that interest rates aren’t the only way to save you money. Lenders also charge fees depending on your deal. A thorough evaluation of your current loan will assess whether the features are still serving you. For example, if you have a package deal that includes a credit card and offset account, moving to a more basic loan that offers a free redraw facility could still suit your needs but potentially save you money in fees.
If you have any questions regarding property finance, and your lending ability or are
ready to purchase your next investment,
Please don't hesitate to contact your Property Strategist.
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