Why rising interest rates shouldn’t stop you from refinancing
Homeowners struggling with higher mortgage payments are being told not to settle for rising interest rates, with tight competition between banks creating opportunities for those willing to negotiate.
In a surprising move last week, three of Australia’s four big banks opted to cut interest rates for new customers, despite the Reserve Bank raising the official exchange rate earlier this month.
Experts said the deals reflect fierce competition in the mortgage market and suggest those who want to refinance can still save thousands of dollars.
“There’s this assumption that because rates are going up, people are on the back foot when it comes to renegotiating their home loan,” said Sally Tindall, research director at RateCity.
“That’s not true – banks still need new customers.
“Understand your value as a borrower, because if you have equity up your sleeve, you’re in control.”
May’s RBA rate hike added more than $50 to the average monthly mortgage bill, and more pain is on the horizon with forecasts that the cash rate could hit around 2.5%.
But while the big banks largely pass on higher rates to existing customers, they actually make their introductory offers for new customers much more attractive.
ANZ, Australia’s fourth-largest lender, cut its lowest variable rate for new customers only from 2.44% to 2.29% on Tuesday.
This follows a similar move by Westpac last week, which saw the bank introduce a honeymoon rate of just 2.09% on its lowest variable home loan. A temporary discount of 0.4 percentage points to the standard floating rate expires after two years.
Commonwealth Bank, meanwhile, has just launched a new home lending vertical called Unloan, which has a variable starting rate of just 2.14%.
Ms Tindall said the moves are surprising on the face of it, but ultimately reflect increased competition for home loan customers, particularly with the rise of smaller independent lenders over the past decade.
These companies, including Athena and homeloans.com.au, pressure big banks into keeping rates low in a bid to entice “rusty” customers to switch lenders.
And because big banks have seen skyrocketing profits during the pandemic, they can afford to offer better rates to customers in an effort to maintain market share.
“Banks fight tooth and nail for new customers – they want to be on the beneficiary side of any refinanced loan, not the losing side,” Ms Tindall said.
“They are always ready to offer ultra-competitive rates to ideal customers.”
Homeowners who have maintained their mortgage payments during the pandemic and increased their equity are in the best position to renegotiate, Ms Tindall said.
Corey Beaver, mortgage broker and managing director of Experity Eight, agreed with Ms Tindall, saying more rate cuts are coming as competition in the market continues to heat up.
“You will see a constant readjustment of the products of the big banks to ensure that they remain competitive,” he said.
Beaver said many customers who pegged their home loans at ultra-low rates during COVID-19 are now on the verge of being pushed to higher variable rates, making renegotiation an important priority.
“If there’s no need to refinance or switch to another lender, you can just go back to your bank and ask for a rate review,” he said.
“Eight or nine times out of 10, we see banks come back with a cheaper rate.”
Quick approvals make refinancing easier
In another promising development for homeowners, banks didn’t just compete on rates.
There’s also been a big shift towards faster home loan approvals, with Commonwealth Bank’s new digital lending brand, Unloan, promising to approve customers in 10 minutes.
Ms Tindall said this means refinancing is not as difficult as it was a few years ago.
“It’s come in leaps and bounds…banks are making loans very quickly, having streamlined the application process,” she said.
“People often put refinancing in the ‘too difficult basket’, but it’s not as big of a chore as it used to be.”