We are often asked “Why should I refinance my loan?” If you ask the Australian Consumer & Competition Commission (ACCC), the answer is clear:
Most borrowers are paying far higher amounts to their lenders than the best rates currently available in the market.
And, the major banks are probably the biggest offenders as their ‘carded variable rate’ is much higher than the best rates they offer their new customers.
The ACCC provided the following information in 2020 for variable rate loans.
| Length of time with loan | Weighted average premium being paid by existing borrowers (per annum) % |
Impact per $100K borrowed (per annum) $ |
Impact on a $500K loan (per annum) $ |
| Less than 1 year | 0.28% pa | $280 | $1,400 |
| 1 to 3 years | 0.47% pa | $470 | $2,350 |
| 3 to 5 years | 0.58% pa | $580 | $2,900 |
| 5 to 10 years | 0.71% pa | $710 | $3,550 |
| Over 10 years | 1.40% pa | $1,400 | $7,000 |
Do the maths for you and your loan:
Your DIY solution
Step 1: Do the research
Step 2: Talk (to your bank)
Step 3: Success! Follow up needed
Step 4: Eternal Vigilance
Step 1: Do the research
Everything starts with research.
Go online to your lender’s website and see what their current advertised rate is for your product, then, compare it to the rate shown on your loan statement.
Go to a rate checking web site and see what the best rate is you think you could get. This can be a bit tricky if you are not comparing like for like with your loan’s product features.
Hints:
1. Make sure you know which product you have with your lender before you start your research. Different products will have different features and different rates.
2. Get a copy of your current loan statements. Online is often easier these days via your lender’s online portal unless you are being mailed paper-based copies and you are keeping them handy. From your statement, grab your current rate plus your account details (you will need these for Step 2).
Step 2: Talk (to your bank)
Be prepared for some frustration as you are about to experience the wonderful ways lenders make it difficult for their ‘existing’ customers to quickly reach the right person!
Your options: you can try to contact them via their Contact Us on their online portal or via their website; you can send an email (trying to find ‘the right’ email address for this can be tricky ); or, you can ring them –but be prepared for a half hour wait (or longer). Remember, you are not their ‘next customer’; you have already bought from them, so they are not in a rush and urgency is much less (for them).
Show them your research and see if they will match their current best rate for you or even better, match a competitor’s best rate.
Step 3: Success! Follow up needed
Once you have communicated with your lender, AND they have promised to reduce your rate to their current rate, it is time to make sure they hold their promise to you –and reduce your rates when they promise to do so. Don’t forget to check your new statements to make sure the rate change has been implemented.
Step 4: Eternal Vigilance
Now is the time to watch your lender’s rates for their next rate change. When any lender makes a public announcement relating to a rate change, check your lender and see if they adjust their rate. We recommend doing this a month or so after a lender (not yours) announces a rate change as it can take time for an industry-wide rate change to filter through to all lenders.
12 good reasons to refinance + a bonus extra!
Other than paying too much of your money to your lender, there are many other good reasons to refinance. Here is a checklist for you to consider.
| # | The good reason |
| 1 | You are paying too much in interest because your lender does not adjust your rates to their current ‘sharpest’ rate. |
| 2 | Your borrower profile has improved. So, you can obtain a lower rate loan. Perhaps when you first applied, your credit score was impacted or your income was lower but now, you are flying at a higher level. |
| 3 | Your property value has increased. Now, you have a lower Loan to Value Ratio (LVR) which will give you a better interest rate with a more suitable product. |
| 4 | You have some personal goals. Take a holiday, buy a car, renovate… and you would like to use the increase in equity in your home (its value less your loan) to do just that. |
| 5 | You want to build your wealth. Using your available increase in your equity might be able to fund the purchase of another property. |
| 6 | You want a more suitable loan product.
Perhaps you thought you didn’t need an offset account but now you have surplus funds earning you zilch interest after tax and if you had an offset account, you could save the full value of your loan interest rate. Or, perhaps you want to lock in a Fixed Rate loan before you think the rates go up. Or, perhaps you are on Interest Only and want to change to Principal and Interest to start making a dent in the amount you owe. |
| 7 | Your Fixed Rate loan period is about to expire, and the Variable Rate being offered by your current lender is not that attractive (HINT: it won’t be attractive –they are banking (sic)on you not checking). |
| 8 | You want to take advantage of benefits being offered by lenders such as Cash Rebates. |
| 9 | You want financial freedom. By paying off your loan more quickly (because you can) allows you to think clearly about your future without debt. |
| 10 | You want to reduce your financial stress. You can do this by increasing your loan term and paying less each month (but more in the longer term). Still, lower stress is a good thing if things are tight financially. |
| 11 | Family issues need to be resolved. As unfortunate as it is, a family break-up will probably require a refinance for one of the parties if they wish to stay in the family home. |
| 12 | Consolidate your debts. When life has been a bit stressful and you have personal debts and loans, it can be smart to consolidate your debts into your lower-interest rate home loan. Just be careful you don’t think ‘I’ve got 30 years to pay this off’ as the longer term and ongoing interest repayments will eat into the short-term interest rate savings you thought of when you decided to consolidate your debt. |
| 13 | Pay off the taxman. You are a business owner and you have found that your business has got behind in paying the ATO. The ATO may be a bit impatient and want payment sooner than the longer-term payment plan you had in mind. |
So, go to it! Look after you and your family and have a look and see what you can save!
Would you like more information? You can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au