Tens of thousands of Aussies are refinancing each month. Should you?

Tens of thousands of Aussies are refinancing each month. Should you?

Canstar analysis of the data shows Australian property owners have refinanced more than $53.7 billion worth of loans in the past six months.

Besides a desire to tighten the purse strings, the mortgage activity is being driven by fierce competition for your debt.

With fewer new loans for several months as the property market pauses during the pandemic, with restrictions to open homes and online auctions only, lenders are aggressively pulling all the levers they can to lure existing borrowers.

There are now introductory interest rates available that are less than 2 per cent. Cashbacks on refinancing have reached as high as $4000 and some lenders are also absorbing application and valuation fees.

So, should you jump on the refinance bandwagon?

The first thing to note is that some of the refinancing enticements are attached to products that are relatively uncompetitive. That is the reason they are being offered – to get borrowers over the line with a short-term feature on a loan that would ultimately cost them more over time.

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Take a $4000 cashback. In just three years you would be behind, based on a $400,000 loan refinanced from 3 per cent to a competitive rate now. With a less generous bonus offer of $2000, you would be going backwards within 1.5 years. Having said that, refinancing is still the best way to cut costs and repay your mortgage years early – for free.

Consider if you move a $400,000 home loan from a typical, discounted big-four bank interest rate of 3.6 per cent to the cheapest loan with an offset account or 2.32 per cent.

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You would save $79,677 but that is over an identical remaining 25-year period – it’s crucial that you refinance a loan over the identical period you have remaining, otherwise you will pay a fortune more in interest, no matter how low the new rate.

However, if you move your mortgage but do not “move” your repayment amount – a strategy I call “up stumps but still stump up” – that figure would leap to $102,742. And you would clear your loan and remove the need to find monthly repayments four years early.

First home buyers leading the charge

The other trend to note in mortgage and property markets is that the significant government stimulus measures for first home buyers seem to be working.

According to the ABS figures, there has been a steady uptick in both the numbers of first home buyers and the amount lent to them month-on-month and year-on-year, as the end-of-the-year expiration of the HomeBuilder grant looms.

The number of loans is up 14 per cent over the month and 24 per cent over the past year.

Canstar finance expert Steve Mickenbecker says: “New lending is well above a year ago and almost back to the pre-COVID peak in January, suggesting that it is not all gloom and doom in property markets.”

However, property investors are still showing little appetite for mortgages. Investment lending is down 5 per cent from July of last year.

Still, investors could also benefit greatly from refinancing, too.

Canstar says the average variable interest rate is 0.53 per cent lower than a year ago – and you can do far better than that if you shop around.

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