Should you refinance your home loan before rates rise?

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Interest rates look set to rise in just weeks, with June 7 firming as the most likely date for the Reserve Bank to increase the official cash rate for the first time in nearly 12 years.

The cash rate hike is expected to be followed by an increase in variable home loan rates meaning that millions of Australian homeowners could soon be hit with higher mortgage repayments.

"After an extended period of record-low interest rates, all signs are pointing to the RBA increasing rates later this year," says Jessica Power, HSBC's Head of Wealth and Personal Banking, Australia.

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"For mortgage holders, this means now could be a great time to consider refinancing and taking advantage of the low interest rates while they last - which can potentially help you save on your loan repayments and enjoy a short tracked journey to home ownership."

When is refinancing worth it?

The benefits of switching to a new loan really depend on the current rate you're getting though, according to Finder's home loan expert Richard Whitten.

"Regardless of what the market does you're going to save a lot by switching at any point," he says.

"But if you haven't refinanced in years then you're probably on a really bad rate. For instance, if your interest rate starts with a '3' or a '4' then you'll likely be able to start saving money from day one by switching."

Here's an example. By refinancing a $400,000 loan (which is being paid off over 20 years with principal and interest repayments) from a rate of 4% to a new rate of 3% you would be able to reduce your repayments by roughly $2466 each year - that's $49,327 in savings over the life of the loan.

And while lower repayments will certainly be a motivating factor for most borrowers, Power notes that there are other pluses to switching lenders.

"Refinancing also can bring a number of additional benefits when done smartly, such as helping you consolidate debts, access your home equity for renovations or investments, or access to features such as redraw facilities or flexible repayments."

Should cashback be considered?

One of the greatest indicators of the competitiveness of the home loan market in recent years has been the rise in the number of cashback offers being promoted by lenders, many of which have been in the $2000 - $4000 range. But are they worth it?

Whitten says that if it comes down to two loans with comparable rates then going with the option offering cashback is a no brainer.

"I can completely understand why people are motivated to switch by cashback and I don't think there's any problem with that at all, but they should be aware of the interest rate they're getting as well because over the long term a competitive rate will almost definitely save you more than any cashback offer."

"The most you're likely to get from a cashback deal is between $2000 and $4000 at most, which is a lot of money, but if you make the switch to a competitive interest rate then you might be able to save $2000 - $3000 in a year depending on what your old rate was."

What does a low rate look like?

So which lenders are offering some of the lowest rates around at present? As the table below shows several of the lowest variable rates in Finder's database are still under the 2.00% mark, though these could obviously change quickly if the cash rate is lifted.

Refinancing aside though, Whitten has encouraged all mortgage holders to take a close look at their financial positions ahead of a likely lift in rates.

"Rate rises are coming - that seems pretty inevitable. So as a current mortgage holder, or someone looking to take out a new loan in the near future, it's worth mentally factoring in the impact of a couple of rate rises on your loan repayments."

"Add an extra 1-2% on top of your home loan rate to see how much your repayments move up by and then you'll be able to see whether you're potentially going to be comfortable making those payments or whether you'll need to adjust your spending down the line."

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Tom Watson is a senior journalist at Money magazine, and one of the hosts of the Friends With Money podcast. He's previously worked as a journalist covering everything from property and consumer banking to financial technology. Tom has a Bachelor of Communication (Journalism) from the University of Technology, Sydney.

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