Refinancing your home loan: What you need to know

If you’re paying more than 2.5% interest on your owner-occupied home loan, chances are you’re paying too much. The Reserve Bank of Australia’s (RBA’s) data shows the average owner-occupier home loan rate for a three-year, principal and interest loan is 2.54%. But there are plenty of home loans offering rates of 2.20% or lower. And it’s not just home loans where consumers can achieve savings. There are lots of opportunities to slash the interest you pay and reduce the life of the loan.

Many Australians automatically choose one of the big four banks – ANZ, CBA, NAB or Westpac – when it comes to lending and especially their home loan. But Australia has a huge range of small banks, non-banks, digital-only banks, and credit unions that offer very competitive lending products. So don’t forget to check out what some of these lenders are offering when you’re refinancing.

Smaller banks and digital-only banks often offer very competitive pricing because they are hungry for your business. They also have lower overheads because they don’t have to maintain a national branch network and pay for extensive marketing. Check out what all the different banks can offer you at ClearScore.

Many of us take out home loans with all the bells and whistles – credit cards, transaction accounts and redraw or offset features – as a matter of course. But these features often add to the cost of your home loan.

So when you refinance, think about which ones you actually need. You might really value an offset account to store extra cash in and reduce the interest you pay on your loan. But you may not also need a redraw facility. Or you may not want an extra credit card that comes with your home loan because you already have one. So shop around when you are refinancing and pick a loan that’s perfect for you.

Research by the Australian Competition and Consumer Commission (ACCC) shows borrowers who have been loyal to their lender pay more interest than new borrowers. Its data shows people with new owner-occupier, principal, and interest mortgages pay 0.26% less in interest than borrowers with existing loans. While that doesn’t seem like much, it really adds up over time, especially when you factor in compounding. Compounding is the multiplication effect that happens over time when you add or subtract the same amount to the principal amount over time.

Here’s an example. If you have a $300,000 mortgage on which you pay interest at a rate of 2.75% over the 25-year life of the loan, you can expect to pay $1,384 a month in repayments or $415,180 in total during the loan’s life. But if you reduce the rate you pay to 2.50% over the loan’s life, you’ll only pay $1,346 a month and will only pay back $403,755 overtime.

As this shows, if you have not refinanced your loan in the last few years it’s worth exploring what different lenders can offer you.

There’s a number of ways you can structure your loan, which all have a bearing on how much interest you pay. Some of the options include interest-only versus principal and interest, with the latter usually cheaper than the former. Fixed, variable and split rate loans are other common options.

The most affordable loan structure tends to be principal and interest, owner-occupier, fixed-term loans, with the RBA’s latest figures showing the average rate for a three-year term for this type of loan is 2.54%. The average rate for an interest-only, owner occupier loan is 5.06%.

Looking at investment loans, the average rate according to the RBA’s number is 2.88% for three-year, fixed interest loans. The average principal and interest investor loan is 5.1%, with the average interest-only rate for a variable loan being 5.36%.

As this shows, there’s a substantial variation in rates. Refinancing is the perfect time to look into these different structures and work out which one gives you the best outcome.

ClearScore is a great place to start to get a feel for all the different options lenders are offering to find the best loan for you. Check out your choices now.