If your loan is more than four years old, the answer might surprise you.
Currently, older loans have significantly higher interest rates, according to the Reserve Bank of Australia. These loans could be up to 40 basis points higher than newer loans. On a $250,000 mortgage, that could cost you up to $1,000 in interest annually. Over the life of the loan, that interest could add up to thousands of extra dollars. What could you do with the extra money?
What You Need to Know about Newer, Lower SVRs
The standard variable rate is set by the lenders themselves. The SVR fluctuates periodically based on changes made by the Reserve Bank of Australia. While a few buyers pay the SVR, most homeowners can negotiate more desirable terms. These discounts can range from 30 to 150 basis points below the SVR and can vary based on numerous factors, including creditworthiness.
Why Are New SVRs So Much Lower?
The comparatively lower costs of new loans might seem perplexing initially. However, according to the Reserve Bank, banks are focusing more on the safer principal-and-interest loans and getting away from potentially risky interest-only loans. However, even new principal-and-interest loans have lower rates than the older versions of these loans. This likely reflects strong competition to attract new borrowers.
How Do Banks Lure in New Borrowers?
They do it with significant discounts on attractive products. Five years ago, the average discount was a mere 100 basis points. By last year, the average SVR discount had soared to 150 basis points. Some loans even offer discounts as high as 200 basis points, which is the equivalent of 2 percentage points, off the standard variable mortgage rate.
Taking advantage of these competitive pressures on banks right now means you can win big.
The SVR is only a small part of the picture. It is a jumping-off point. The advertised rates are often much lower than the SCR, and you can save 50 to 100 basis points or more on owner-occupier loans.
With good credit, that discount might be even lower
Is It Time to Refinance?
Almost three-quarters of Australian households own or are purchasing a home, often using a mortgage. A mortgage can be among the biggest financial decisions you might ever make. While we might buy and sell our homes, and get a new mortgage, most people will not have more than one or two mortgages throughout a lifetime. Still, refinancing can make good financial sense for some of us.
Refinancing an SVR Mortgage Loan
Is it worth refinancing my mortgage loan?
Shopping around for a new mortgage can take a little time, but that investment in time can more than pay for itself in savings. According to the RBA, if you bought your home more than four years ago, you could save a lot in interest just by refinancing.
Older mortgages are likely to carry interest rates that are 40 basis points higher than more recent loans. If your loan is over eight years old, you might be paying even more. According to the RBA, you could be paying 60 basis points more than a new home buyer.
You might benefit from a new standard variable rate home if you:
- Are borrowing at least $250,000
- Are interested in taking advantage of the extra features associated with an SVR loan
- Can afford potential increases in interest rates
- Are open to changing lenders
Taking Advantage of Competitive New Products
Do the benefits of refinancing outweigh the inconveniences?
When it comes to refinancing, there is no single right answer. However, for many property owners, the advantages of refinancing outweigh the disadvantages.
The biggest and most obvious benefit is lowering your SVR. If you qualify for a significantly lower interest rate, you could save thousands of dollars over the life of the loan. You could put the extra towards your principal and pay your mortgage off faster. You could also put the funds into savings or towards other essentials.
Additionally, when you refinance, you may be able to access some of the equity that you have accrued in your home. The equity is the difference between the value of your home and the balance of your loan. If your home’s value is greater than the amount owed on the loan, then you might have equity that you can use to improve your home or consolidate other debts.
About Quantum Finance Australia
At Quantum Finance Australia, we can help you determine if refinancing is a good choice for you. We can help you explore your options after accounting for your earnings, your financial obligations and your ability to make additional payments. We will also explore a variety of loan terms and variable interest rates and ratios.
Because the rates change periodically, reevaluating your options periodically can be in your best financial interest. If your home loan is no longer in line with current rates, our team will help you understand and consider your options so that you can make the best decision for your financial situation. Contact us today to learn more or to schedule an appointment with our team.