Why you should refinance your home loan and save at least $400 a month

Mortgage interest rates are at record lows, but that doesn’t necessarily mean that your home loan payments are any less now than they were a year ago. Consider this. The Reserve Bank’s official interest rate is at a tiny 0.25%, and yet according to several of the comparison sites the average standard variable home loan is at 4.63%.

That is a whopping margin you are paying to your bank for the privilege of having your loan with them. No wonder they are slow to pass on interest rate cuts.

One course of action is to call the bank and ask for a lower rate, and threaten to go elsewhere.

They will probably listen politely and offer a modest discount, say around 25 basis points, and you will probably go away feeling pleased with yourself.

The reality is that right now there are great deals to be had in re-financing your home loan. It does take a bit longer and you need to have all your documentation in place, but the rewards can be stunning in the current market.

Say you have a $400,000 loan on your house and you are paying the average 4.63% principal and interest monthly over a 30 year term. According to ASIC’s Moneysmart mortgage calculator, that means you pay $2,068 per month.

The calculator also says that the average new standard variable home loan is at 2.76%. Monthly payments over the same loan period are now $1,645.

This is a saving of $423 per month, or $5,076 per year. That is enough for a big Christmas, or even a holiday.

Banks are not in the habit of rewarding long term customers. They are in the habit of milking them while they go hunting for new customers, and re-financing turns you from an established customer into a new one.

Let’s say you are currently on a mortgage holiday due to the COVID-19 disruptions , along with around 430,000 other Australians. You might also be on the JobKeeper payment because your employer is also in financial distress.

All this is due to end after September, and even though you might not be working full time again you’ll still be up for the $2068 per month as the mortgage kicks in again.

If you are in financial stress, re-financing with an interest only loan could be the way you can hang onto your house and make it through to a time when you are more financially secure. It might also be an alternative to raiding your superannuation.

According to ASIC Moneysmart, an interest only mortgage can be had for 3.41% right now.

This means that for that same $400,000 loan, your monthly payments would be $1,364 per month.

This equates to $16,368 per year or $314 per week, which is surely less than you would pay if you were forced to sell your home, and then rent.

This is clearly not a long term strategy, but it might be a survival strategy, and that might be worth considering in a time of a global pandemic.