Interest rates naturally rise and fall, and these can leave homeowners scrambling to decide what to do next. Everywhere you look at the moment there’s news about rapidly lowering interest rates. As of early 2021, interest rates have actually never been as low as they are right now in Australia.
With this in mind, how does your current loan interest rate compare? More importantly, should you consider refinancing your mortgage during this period of low rates?
In reality, there’s no clear answer to this question. While it’s true you can lower your monthly payment and overall spending if you refinance to secure a better rate, this is a big decision. It’s not only a time-consuming, complicated process to refinance, but you need to ensure it’s a good fit for your long-term goals.
Why Are Current Mortgage Interest Rates so Low?
First, let’s explore what’s driving these low rates right now in Australia. As of March 2021, the average interest rate reached a minimum of 1.99%. While these are always changing to reflect the market, there’s no denying that these are low, competitive rates.
What’s leading to such low rates under 2%? It’s all tied to the economic fallout from the COVID-19 pandemic. The property market is in a whirlwind, and many have lost their jobs unexpectedly during the economic crisis.
This means competition is fierce in the home loan market. To encourage more buyers, lenders slashed their home interest rates. While this is excellent news for those buying a home right now, these prices won’t last forever. Some experts predict these mortgage rates to rise yet again by the end of 2021 into 2022.
What Does It Mean to Refinance?
Unless you’re currently buying a home, you might wonder why it matters that these home rates are so low. If you currently have a mortgage, you can always choose to refinance your loan.
When you refinance, you essentially trade your old mortgage for a new one. Your new lender (if you choose a new one) pays off your old mortgage with your new loan. By doing this, you can secure this lower interest rate and shorten your overall payment term. You also might be able to take advantage of some of your home equity by turning it into cash.
While this might sound like a great option, it’s not always that black and white. There are some fees associated with refinancing, and you need to make sure you actually save money throughout the process.
Is Refinancing Right for You?
Low interest rates tend to create a refinancing frenzy in the marketplace. Even if you’re ready to take advantage of the lower rates right now, it’s important to understand the details related to your specific situation. Consider these key questions below before you decide what’s right for you.
How does your current rate compare?
First, decide how your current rate compares to the lower interest rates in the market today. Instead of looking at the difference in interest percentage, look at how much money you might potentially save. A small savings of 1% might not matter so much if you have a $100,000 mortgage. On the other hand, if you’re paying off a $500,000 mortgage, that 1% goes much farther.
How long are you keeping your mortgage?
Because there are costs associated with your refinance, you might not stand to save much if you plan to sell your home in the next few years. However, if you plan to keep your home for a long time, it’s more likely that you’ll save big by refinancing.
Can you change your loan term?
Lastly, if you can refinance to shorten your loan term, you’re more likely to save long-term. However, if you have to extend your loan term (ie. you have 20 years left and you refinance to a 30-year term), you might not actually save money throughout the life of your term.
As you can see from the points above, it’s essential to create a clear budget, understand your current mortgage, and shop around for the best rate before you refinance. While it might sound like you have a lot to gain, you could end up costing yourself in the long run.
Make an Informed Decision About Your Mortgage
Refinancing your home while rates are loan can be a great choice if you’ve thought about refinancing recently. That being said, it’s important to understand the full picture before you make any big decisions about your mortgage. While you could secure a better, more affordable loan, you might also end up spending more when it comes to fees and the term of your loan.
Not sure whether a home refinance is right for you? Talk to our experts. At Debt Busters, our team of experts have over 15 years of experience helping Aussies make the most of their mortgage and current rates. Contact our team today on 1300 368 322 to get started.