Refinance Now Or Wait: Is The Peak Of Interest Rate Increases Behind Us?
Takes only 3 minutes
28 Feb, 2023
Updated: 10 Jul, 2024
Refinancing can be a smart financial move for homeowners looking to save money in the long run or reduce their short-term living expenses. Despite the record numbers of mortgage holders who have already taken advantage of refinancing, many have yet to explore whether they could potentially save money each month. Experts warn that procrastination in assessing one’s loan could mean missing out on the chance to reduce mortgage payments. The following case study shows how much a lower interest rate can generate in savings.
Case Study
John purchased an investment property in Sydney a few years ago. He had taken out a 30-year loan with an interest rate of 7.75%, but after doing some research, he found a lender willing to approve his refinancing application with an interest rate of 5.54%. That’s a reduction of 2.21 percentage points, which translates to significant savings each month. With a loan amount of $500,000, John had been making a monthly mortgage payment of $2,800 at an interest rate of 7.75%. However, after refinancing at 5.54%, his new monthly mortgage payment is around $2,259. That’s a savings of $541 per month, which also helps him save around $195,000 over the life of the loan.
Navigating The Refinancing Maze: Choosing Between Fixed And Variable Rates
During the Reserve Bank’s determination to hike interest rates to curb inflation, Australian homeowners face a difficult choice: whether to opt for a fixed or variable rate when refinancing. Mortgage brokers at Home Loan Experts suggest that homeowners conduct a ‘health check’ on their home loan rates, especially those who are among the many nearing the end of their fixed terms. By conversing with their bank and exploring the available options, homeowners can ensure they can manage their debt and service their loans. Most fixed rates are around 6% as of late February 2023. And the decision to lock in at that level or ride out the interest rate increases with a variable rate is crucial, especially since rates are expected to peak in the next six to 12 months before dropping again. With all this uncertainty, homeowners must act now to secure their financial future. The chart below shows how fixed and variable loans differ in some key ways.
Fixed Vs. Variable Home Loans
| Fixed Interest Rate Home Loan | Variable Interest Rate Home Loan | |
|---|---|---|
| Impact on repayments | Predictable repayments for budgeting: A fixed interest rate means the amount you repay each month stays the same for a fixed period. This could mean savings or extra costs, depending on which direction interest rates move during the fixed term. | Potential for lower repayments initially: Variable interest rates can be lower than fixed rates while rates are rising, which means you may start the term paying less in monthly repayments. |
| Stability | Protection against interest rate rises: With a fixed interest rate, you are protected against any potential rate increases during the fixed period. | Repayments may increase with rate rises: With a variable interest rate, your repayments may increase if interest rates rise during the loan period. They will decrease if rates go down. |
| Budgeting certainty | Security and stability: With a fixed interest rate, you know exactly what your repayments will be each month for the fixed period. | As repayments can fluctuate with a variable interest rate, it can be harder to plan and budget for the future. |
| Flexibility | Limited options if rates fall: If you have a fixed interest rate and rates drop, you won’t be able to claim any potential savings without facing substantial break costs. | Ability to take advantage of rate reductions: If interest rates drop during the loan period, your repayments will go down. You can continue to make the same repayments and pay off your loan sooner or save each month. |
| Extra repayments | If you pay off your fixed-rate loan early, you may be charged break fees. | Variable interest rates often come with more flexible repayment options, allowing you to make extra payments or pay off your loan quicker without penalties. |
Have Our Experts On Your Side!
If you’re in this position, consider seeking the advice of experts. Contact Home Loan Experts on 1300 889 743 or complete our free online assessment form today to explore your options. Starting the process as soon as possible can help you avoid missing out on potential savings due to delays or interest rate changes. Take control of your financial future now, before it’s too late.
