Tomorrow the RBA will meet for its August board meeting and rather than having a quick catch-up and deciding “yep let’s leave the official cash rate where it is”, things are tipped to get interesting – according to economists they might actually cut interest rates!
What does this mean? If the Reserve Bank does slash the official cash rate by another 25 basis points, this would bring the official cash rate down to 1.50% and the home loan market would get the second shake up of the year.
Scenario – How much could an average homeowner save?
Let’s look at the potential savings for a family with a $700,000 loan – For the sake of the scenario, I’ll use the average rate currently in our home loan database of 4.52%. Say property owners Bob and Jane are currently being charged this rate, and after the RBA rate cut it comes down to 4.27%, over 25 years they would save a significant $29,630 in interest.
A nice sum right? And enough for that European adventure Bob and Jane had always dreamed of. But that’s only if their lender actually does follow in the RBA’s footsteps and drop their rate by 25 basis points, which as the last few RBA rate reductions have shown, they don’t always do.
Let’s make this scenario even more interesting, what if this couple (rather than waiting for their lender to drop rates, if they do at all) actually spent a few hours comparing home loan packages online, and made the RBA rate cut a non negotiable?
That’s where the savings are really substantial! Now I’m going to pull the best rate in our database of 3.59% and compare it against the average rate above of 4.52%. The difference over the same 25 year term is $108,160 and Bob and Jane could turn that European adventure into a major year long globetrott.
The best part about this scenario is even if the RBA decides to do the unexpected and leave rates on hold tomorrow, by refinancing you’ll be giving yourself your own rate cut.
Tips for making the home loan switch:
If you think you might like to cash in on the record low interest rate market here are some tips for, firstly, choosing whether it is the right decision for you and how to go about nabbing the best possible home loan package:
1. Consider the refinancing costs
While switching home loans when interest rates hit record lows is a savvy move as it could potentially save you tens of thousands of dollars, there are times when the savings aren’t worth the switching costs. Such as when…
- your LVR is still higher than 80%. If you only took out your mortgage a few years ago and still owe more than 80% of the property’s value then you’ll have to fork out for lenders mortgage insurance again, which might make switching at this time just too expensive. If this is the case, wait it out until you’ve tipped under that 80% mark to refinance.
- you’re locked into a fixed rate loan. Ah break cost fees – those high charges hidden in the fine print if you try to refinance before the fixed rate term comes to an end. Break costs are charged as a percentage of your loan amount, so if you still have a high amount owing it could make switching a pricey pursuit. Again this could be a case of waiting it out until the fixed term ends to switch.
2. Do your research
If you don’t fall into either the a) or b) categories then switching could be the smartest move you make in 2016. The first thing you should do is conduct a little recon work, by putting aside some time this week, it might just be an hour, to see what home loan packages are currently available in the market.
It’s also a wise idea to check out what other customers have to say, because who knows better how a lender performs, than other borrowers just like you?
3. Think about the features
Gone are the days, when you had to forfeit great features like an extra repayments and redraw facility for a low interest rate, as what is happening more and more in the home loan world is low rate mortgages, coming with flexibility.
A good example of this is UBank with its UHomeLoan – Value Offer that not only has a low 3.74% (3.74% comparison rate) but also comes with both of these features attached. Or if an offset account is a must Click Loans The Online Home Loan has just that and a low 3.84% (3.83% comparison rate) – both loans available for borrowers with an LVR under 80%.