Unprecedented levels of interest rate increases have led to a declining lending market for banks and other lenders. So, what do you do as a business that is struggling to bring in new customers? You offer incentives of course. But are these incentives worthwhile to us as consumers?
Over the past 12-18 months we have seen banks offer borrowers anywhere from $1,000 to $6,000 as a cash payment as an incentive to refinance their home loan. While this may sound enticing, as consumers it’s vital to explore the other potentially more relevant factors?
Let’s put this in perspective.
How much can you save from refinancing your home loan?
The Australian Bureau of Statistics suggests that the average home loan in Australia as of October 2022 is roughly $594,000. An average customer who walks through the door at a bank (or more wisely, approaches a broker to help them) is looking at an interest rate of just under 5% for a new owner-occupied home loan. However, if you have had your existing mortgage for some time now, and have not either refinanced your home loan, or approached your current lender for a rate review, you could be paying up to 6% for that very same albeit slightly older mortgage. That’s 1% over what this same lender is offering to new customers (where is the loyalty?).
1% of $594,000 is $5,940, meaning an interest only home loan of this amount with a 1% saving is going to be $5,940 better off over the next 12 months, if you manage to get that reduction through a refinance or negotiating with your current funder. This savings figure is slightly less if you have a Principal and Interest loan but not overly different.
How much does it cost to refinance your existing loan?
But what about the cost of changing?
To refinance your home loan, let’s say the current lender charges you $300 to discharge your loan. Then the government discharge fees and re-establishing a mortgage (say $300 roughly). Then potential upfront fees for the new lender of $200-$500. There’s $800 to $1,100 in costs, which seems insignificant when considering the almost $6,000 in savings in the first year alone you are likely to incur as a result of your move.
So, what about the cash back offer from the bank? While it’s always nice to receive a one-off payment, don’t let that be the only reason you consider your options. A lower interest rate is almost always better for you as a consumer than any cash back offer.
Is the cash back offer a better deal?
Obviously, everyone’s situation is different so grab a pen and paper and work out those numbers before making any decisions. And if you don’t have the time or need further assistance… call us at Chan and Naylor Finance to see how we can help.
Aaron Hickey is a credit representative number 495791 of BLSSA Pty Ltd ACN 117 651 760 (Australian Credit Licence 391237)