The RBA’s decision today to hold the cash rate at 4.35% may not have come as a surprise, but for mortgage holders, it was more disappointing than the fourth Thor movie
…if you haven’t seen it, save yourself the trouble.
The RBA has now held the cash rate at 4.35% for 12 months, and is expected to continue to hold it until at least February 2025 (according to the experts).
Because while inflation has dropped below 3% (aka into the RBA’s target range), the trimmed mean inflation is still sitting at 3.5%.
And with the Christmas season coming up, and the US election, it seems like there’s just too much uncertainty for the RBA to reduce the cash rate.
However, the RBA is facing more pressure than your office coffee machine on a Monday morning to give mortgage holders what they’ve been waiting for.
Mortgage-holder stress is building
According to a report by Finder, a record 47% of homeowners are struggling to pay their home loan under the current interest rate pressure.
One third of surveyed homeowners said that they would need their repayments to drop by at least $500 a month to be financially comfortable again. And 14% would need their repayments to fall by $1,000 a month.
Knowing the RBA isn’t expected to budge on the cash rate for at least a few months, many homeowners are in a tight spot and looking for ways to keep themselves afloat until the interest rate pressure eases.
In fact, more and more homeowners are exploring refinancing as a result.
What does refinancing mean?
Refinancing is when you move from your current home loan provider to a new one.
Your relationship with your lender is unlike most relationships in your life. You don’t need to commit forever, and you’re welcome to play the field, and shop around for other options if you want to try something new.
You might refinance in order to:
Get this: the average refinancer had a variable rate of 5.01% before refinancing. But after refinancing, the average new variable rate dropped to 4.78%.
And as interest rate pressure was mounting over the last couple of years, refinancing became an increasingly popular strategy to cope and keep mortgages under control.
In fact, in 2023, refinanced loans hit a total aggregate value of $220.4 billion, up 11.4% on the year before.
For anyone keen to refinance, the process starts with comparing your current lender’s rate with competitors.
When you’re comparing, the comparison rate is what you want to look at - it’s how you can compare the true cost of the loan against others.
But before you get deep into comparing lenders to refinance, it’s important to be aware of the advantages and costs involved.
Advantages of refinancing
1. You can get a lower interest rate
Duh! This is the main reason for homeowners to refinance, especially now, given the RBA’s strong position on holding the cash rate.
2. You can increase your loan amount
Once you build equity in your property, you can use it to increase your borrowing. That might not always be possible with your current lender, so sometimes homeowners refinance and shop around to find a bank that can help them increase their borrowing.
3. Access to new loan features
Some homeowners refinance to get access to features such as offset accounts or redraw facilities.
Disadvantages of refinancing
1. It’s costly
No such thing as a free lunch right? Like most things in life, refinancing comes with costs.
The costs involved will vary case by case but expenses such as mortgage breaking fees, application fees, or settlement fees might be involved.
Roughly the cost of refinancing a mortgage is about $1,000 but some of the costs will be added to your loan rather than charged up front.
2. Lenders Mortgage Insurance
If you don’t have at least 20% equity in your mortgage, you will likely need to take out lenders mortgage insurance when you refinance. This insurance protects your lender in case you default on your loan but unfortunately the cost of the insurance falls on you.
3. Your credit score
When you apply for new credit, it’s recorded in your credit report, and if your refinancing application isn’t approved, that could lower your credit score, and make it harder for you to access lower interest rates in future applications.
The good news is, despite intense mortgage stress for homeowners, economic sentiment has actually jumped from 7% in August to 10% in November. That means Aussies are feeling more optimistic about their finances and the state of the economy.
It’s pretty clear that we’re now in the final stretch of the RBA’s tough cash rate control. So with inflation well and truly tracking down, we are making progress towards a future where interest rates are dropping.
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