Variable mortgages to rise by another 0.25% - refinancing could save tens of thousands

The Reserve Bank has today increased the cash rate by 0.25 percentage points to 3.10 per cent, the highest level in over a decade.

In the Governor’s statement today, the RBA has confirmed there are further rate hikes to come to rein in inflation, although he reiterated that the Board “is not on a pre-set course”.

If lenders pass on the 0.25 percentage point hike, as expected, the average owner-occupier with a $500,000 loan and 25 years remaining will see their repayments rise by $75.

However, this is now the eighth rate hike in as many months. For someone with a $500,000 debt at the start of the hikes in May of this year, their repayments will increase, in total, by $834.

Expected increase in mortgage repayments 

Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA avg. existing owner-occupier variable rate of 2.86% in April and assumes banks pass the hikes on in full.

After this hike, RateCity.com.au estimates:

• The average existing owner-occupier variable rate will be 5.86%.
• A competitive variable rate will be under 4.70% for owner-occupiers paying principal and interest, however, a handful of lenders are likely to still offer rates under 4.50%.

How much can variable borrowers save by refinancing?

If someone with a $500,000 debt today and 25 years remaining on their loan refinanced from the average variable rate to one of the lowest in the market, RateCity estimates they could save up to $19,451 in the next three years. This includes the costs of refinancing and assumes the cash rate moves in line with Westpac’s forecasts.

Someone with a $1 million loan refinancing from the average rate to one of the lowest could save an estimated $39,844 in the next three years.

Potential savings by refinancing

Based on an owner-occupier switching from the average rate of 5.86% to a rate under 4.5%. Includes switching fees.

Source: RateCity.com.au. Notes: based on an owner occupier paying principal and interest with 25 years remaining on their loan. Assumes borrower is on the estimated average owner-occupier variable rate of 5.86% and moves to one of the estimated lowest variable rates on the RateCity.com.au database. Includes switching costs and assumes the cash rate continues to move in line with Westpac’s forecasts.

RateCity.com.au research director, Sally Tindall, said: “While plenty of borrowers would have liked the cash rate to stay on hold ahead of Christmas, the RBA is focused on the task at hand, which is to get Australia’s inflation problem back under control.”

“Inflation might have dropped, but it’s still at worryingly high levels. A hike sends a very clear message to the country that there is more work to be done,” she said.

“This is the RBA’s eighth hike in as many months, sending the cash rate to a decade-long high.

“In November last year, APRA told the banks to start stress testing people’s loan applications to make sure they could still meet their repayments if rates rose by 3 percentage points. Just over a year later, we’re already at this level with more hikes still to come.

“Spend the summer getting your finances in order by understanding what your repayments will be after this hike, but also how high they could go next year. If you know you won’t be able to make those higher repayments, take action now.

“One of the most effective ways to inject ongoing relief into your budget is to refinance to a lower-rate lender.

“Switching banks might seem as appealing as sticking pins in your eyes. However, with many lenders now offering applications in less than an hour, it should leave people time to apply and still get to the beach.

“If you can’t make the budget stack up, call your bank well before you miss a repayment to see what options you have. Also spend some time getting independent financial advice,” she said.

Tips for refinancing:

• Check your new rate and compare it to what other lenders are offering. Make sure the new lenders’ rate has factored in the most recent RBA hikes.
  
  
• Check your equity: if you own more than 30% of your home at today’s values, you might be eligible for rate discounts. However, if you own less than 20% you might find it costly to refinance.
  
  
• Don’t extend your loan term: if you’re 5 years into a 30-year loan term, then ask your new lender for a 25-year loan term, or shorter if possible. Extending your loan back out to 30 years might lower your repayments, but you’ll pay for it in the long run.
  
  
• Make higher repayments: if you can keep paying the same amount as on your previous loan you’ll save on interest and build a buffer for down the road.
  
  
• Beware of cashbacks: while cold hard cash offered by lenders to tempt you to switch can be appealing, beware of taking a cashback deal at the expense of a higher rate.
  
  
• Ask the new lender to waive upfront fees: banks are hungry for new borrowers, particularly ones with a good track record of paying down their loan. If you don’t ask, you don’t get.

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