Rates are down, but so is mortgage refinancing


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Interest rates have dropped to historic lows, but that hasn't translated into a wave of refinanced home loans.

According to research by comparison site Mozo, just 6% of mortgage holders have refinanced over the past year. That's only 321,364 mortgage holders, meaning that 4.6 million Aussies are potentially missing out on thousands of dollars in saved interest.

"In the last six months we've seen interest rates fall to record lows, home loans are essentially on sale, which doesn't happen very often," says Mozo director Kirsty Lamont.

consumer confidence housing Westpac-Melbourne Institute Consumer Sentiment Index june 2017

"This year more than ever, households could benefit from having extra cash in the weekly budget, so now is a great time to review your mortgage and make sure you are getting the best deal possible."

Admittedly, COVID-19 has negatively affected many people's financial health and by extension their capacity to refinance.

"This year has brought unprecedented challenges to many Australians, and many are facing hardship. While many are not in a position to refinance their home loan, a large majority of mortgage holders are missing out on savings of thousands of dollars."

The average variable home loan rate for owner occupiers is 3.38%, while the average two-year fixed rate is 2.54%.

According to Mozo, if a homeowner refinanced their remaining 20 year loan of $400K at 80% loan to value ratio from the average variable interest rate of 3.38% to the most competitive rate of 2.19%, they would save $2,826 a year.

"Twelve months ago the average variable interest rate was 4.35% and the average two year fixed rate was 3.95%. It could be safe to say that many mortgage holders are still making repayments at a far higher interest rate than what is currently available. Although customers who are locked into fixed rate offers could face hefty breakfees, they need to weigh up the costs of breaking that agreement."

"One of the biggest benefits of refinancing is paying off your loan faster. The quicker you pay off your mortgage, the less interest you pay overall. Australians who are in a position to do so should really be taking advantage of these record low rates to pay down as much of their principal as possible."

Meanwhile, Corelogic's Quarterly Economic Review has sought to quell fears of the September fiscal cliff, when banks are expected to wind back mortgage holidays.

"It is important to remember that no entity has an interest in seeing residential mortgages fall off a 'cliff' come September. Residential mortgage lending accounts for about 60% of bank lending. Housing accounts for about 53% of household wealth, and the accumulation of wealth in housing eases pressure on the government to fund Australians in retirement."

The report also draws attention to the fact that not every Australian has the same level of risk when it comes to housing and debt.

"For example, around 30% of Australian households own their home without a mortgage. RBA research suggests that over 50% of loans had repayment buffers of at least 3 months, and about 30% of loans had prepayments of at least 3 years."

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David Thornton was a journalist at Money from September 2019 to November 2021. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.