If 2020 was the year of plummeting home loan rates, 2021 may be the year you finally consider refinancing your home loan.
Refinancing has increased over the last year, with the latest ABS Lending Indicator data showing 237,632 homeowners switched mortgages since the start of Covid-19 in March 2020.
This is because thousands of Australians are looking to shave tens of thousands of dollars off of their mortgages, and potentially cut down the years they’re repaying their balance.
In a time when every dollar counts for household budgets, it’s no surprise so many Australians are looking to get a little breathing room from their mortgage repayments. Let’s take a look at just how refinancing may help your finances in 2021.
5 reasons refinancing may save you big
1. Get a lower interest rate
One of the biggest ways you may be able to save by refinancing is by switching to a lower rate home loan. This is because by lowering your interest rate you’re not only lowering the amount you’ll repay each month, but you’re lessening the total interest you’ll pay over the life of your loan.
For example, John is on a 30-year, $500,000 mortgage and paying a rate of 3 per cent. His current monthly repayments are $2,371 a month.
He decides to refinance to a new lower rate loan of 1.8 per cent after five years and keeps the same loan term remaining. This reduces his monthly repayments to $2,071 a month. This now saves him $300 a month, or $3,600 in a year.
These savings are the equivalent of paying his energy bills or a weekend away with the family.
Refinancing on a $500,000 home loan
| Interest rate | Monthly repayments | Total repayments over loan term | |
| Original loan | 3.00% | $2,371 | $711,317 |
| Refinanced loan | 1.80% | $2,071 | $621278 |
| Difference | 1.20% | $300 | $90,039 |
Note: Figures based on hypothetical loan example that does not factor in fees or ongoing rate changes.
2. Pay fewer fees
It’s not just the interest rate that will sting your household budget, but the ongoing fees associated with a mortgage too. Even if you have a relatively low interest rate, ongoing fees can add up over time.
Depending on your lender, the fees you pay may include:
- Monthly service fees
- Annual fees
- Extra repayment fees
- Late payment fees
- Redraw fees
With annual fees alone skyrocketing as high as $400 in some cases, refinancing to a new home loan that charges fewer, or no fees, may save you some serious cash.
3. Increase flexibility and features
Another popular reason Aussie borrowers refinance is to add greater flexibility and features to their home loan. This means to refinance to a loan that offers helpful tools such as:
- An offset account
- A redraw facility
- A line of credit
- The ability to make extra repayments
- The ability to split your loan repayments
Generally speaking, when you signed up to your first mortgage you may not have been offered the most competitive loan on the market. After all, your deposit may not have been over 20 per cent and all of your savings were realistically going into the property purchase.
This means the loan you’re on may be a more basic package and not offer you the kinds of helpful features listed above.
And some of these helpful features can help you to shave thousands off your mortgage as well, such as making extra repayments or putting your savings into your offset account to lower your monthly repayments.
4. Take advantage of deals
At any given moment there are a range of home loan deals available. These deals may come in the form of cashback, waived upfront fees, waived lenders mortgage insurance or even bonus frequent flyer rewards points. If you’re considering refinancing, another way you may save big is by switching to a home loan offering any one of these generous deals.
RateCity research shows that as of February 2021, there are 21 cashback deals on offer specifically for refinancers. These range between $1,000 and $5,000, depending on the lender and the size of your mortgage.
Cashback deals for refinancers
| Lender | Refinance Cashback |
| Bank of Melbourne |
$4,000 |
| 86400 |
$2,000 |
| Bank of China |
$2,288 |
| Bank of Queensland |
$3,000 |
| BankSA |
$4,000 |
| BankVic |
$1,500 |
| Bankwest |
$2,000 |
| BCU |
$3,000 |
| CBA |
$2,000 |
| Citi |
$4,000 |
| Credit Union SA |
$2,500 |
| CUA |
$2,000 |
| MyState Bank |
$2,000 |
| NAB |
$2,000 |
| People's Choice Credit Union |
$4,000 |
| Police Bank |
$2,000 |
| RAMS |
$4,000 |
| Reduce Home Loans |
$5,000 |
| St.George Bank |
$4,000 |
| Virgin Money |
$3,000 |
| Westpac |
$3,000 |
Source: RateCity.com.au. Data accurate as of 02.01.2021.
One perceived barrier to refinancing can often be the upfront costs involved in switching loans, including application fees and valuation fees. Cashback deals help to reduce these upfront costs and encourage borrowers to refinance. You may also be given the option to have the cashback deal given to you in the form of cash or even gift cards to an affiliated retailer.
5. Access equity in your home loan
After a few years of paying off your home loan, you may have saved up a little equity. Refinancing may also allow you to access this equity, which you may use for home renovations, paying for a wedding or a holiday, or even to pay off debts.
Equity is the difference between your property’s value and how much is owing on your mortgage. For example, if a property is worth $700,000 and your mortgage balance is $400,000, the difference of $300,000 is the amount of equity you have to work with.
When it comes to refinancing, equity may be used as security to allow you to borrow more money. The extra money you borrow may be provided as a line of credit or a lump sum.
Be aware that when you borrow more money, you’ll be adding to your mortgage size. This means you’ll typically end up paying more interest over the life of your loan, and potentially increase your ongoing repayments. So, while you may be saving money by paying off your debts today, or avoiding a personal loan for renovations, the long-term interest charges may outweigh the short-term savings.
Common refinancing traps
Before you refinance your home loan to save money, keep in mind the following common refinancing traps:
- Extending the life of your loan. Many homeowners make the mistake of extending their loan term when refinancing and getting stung by interest repayments. For example, you may only have 15 years left on your mortgage, but when you refinance, the lender adds another 20 to your loan term.
- Fees. There will always be some costs involved with switching a home loan, such as discharge fees if you’re leaving a fixed-rate term early, application fees and more.
- Packaged products. Are you on a package home loan? Don’t forget you may need to unbundle these packaged products, such as your credit card or an offset account, before you refinance your mortgage.
Lowest interest rates on the market
Considering refinancing to a lower rate lender? Take a look at some of the current lowest interest rates on the market.
Owner-occupier, variable, principal & interest
| Lender | Product | Interest Rate | Comparison Rate |
| Reduce Home Loans | Rate Cutter Home Loan |
1.77 |
1.83 |
| Homestar Finance | Star Gold Home Loan |
1.79 |
1.84 |
| Pacific Mortgage Group | Standard Variable Home Loan |
1.89 |
1.89 |
Source: RateCity.com.au. Data accurate as of 02.01.2021.
Owner-occupier, fixed, principal & interest
| Lender | Home loan | Interest Rate | Comparison Rate | Fix term |
| UBank | UHomeLoan |
1.75 |
2.22 |
3 years |
| HSBC | Package Fixed Rate Home Loan |
1.88 |
2.98 |
2 years |
| Homestar Finance | 2 Year Fixed Rate Special |
1.88 |
2.26 |
2 years |
Source: RateCity.com.au. Data accurate as of 02.01.2021.
Investor, variable, principal & interest
| Lender | Product | Interest Rate | Comparison Rate |
| Northern Inland CU | Dream Value Package Investment Loan |
1.89 |
2.29 |
| Freedom Lend | Freedom Variable Investment Loan |
2.27 |
2.27 |
| Homeloans.com.au | Low Rate Home Loan - Prime |
2.29 |
2.31 |
Source: RateCity.com.au. Data accurate as of 02.01.2021.
Investor, fixed, principal & interest
| Lender | Home loan | Interest Rate | Comparison Rate | Fix term |
| Northern Inland CU | Investment Loan |
1.99 |
4.17 |
4 years |
| RACQ Bank | Choices Fixed Investment Loan (QLD only) |
2.09 |
4.21 |
3 years |
| UBank | UHomeLoan |
2.09 |
2.6 |
3 years |
Source: RateCity.com.au. Data accurate as of 02.01.2021.
