Lender competition is heating up but do the sums before you refinance.

Australia is entering a new low-interest-rate environment and smart borrowers should seize the opportunity to sift through the competitive loans on offer.

The Reserve Bank’s decision in December to cut the cash rate by 25 basis points for the second month in a row is positive news for buyers and borrowers.

So it’s a prime time to shop around for a refinancing deal.

What’s most interesting, though, is that the RBA is cutting rates when lenders are fiercely competing for increased business. The total value of new housing loans in Australia has fallen markedly since 2010 as people have opted to save.

In the year to last September, Australians took out about $3.5 billion less in new home loans compared with the previous 12 months. Little wonder that lenders are falling over themselves to offer tailored rate deals, often discounting their advertised variable rates, to attract new business.

We’re going to see a lot more of this off-market wheeling and dealing. Borrowers can also expect hot competition between banks and non-bank lenders – even more so if, as economists widely expect, the trend to interest rate cuts continues throughout this year.

Damian Smith, the chief executive of financial services comparison website RateCity, says the discounting of advertised variable rates is widespread and lenders are also offering ”historically low” fixed rates.

Mr Smith says fixed rates have taken the steepest dive, with three-year offerings falling to 6.29 per cent on average in December and starting at just 5.75 per cent.

”There are plenty of three-year fixed rates at 5.99 per cent,” he says.

”That’s a really low rate relative to the cash rate and to the average variable rate.”

If you have substantial equity in a home or in investment properties, you’re in a strong position to negotiate a hard bargain.

Apart from lower rates, lenders are offering sweeteners, such as the waiving of application fees.

Some will even pay borrowers $1000 or so to cover costs associated with leaving an existing lender.

The abolition of exit fees, which came into force in July, makes it easier than ever to switch lenders.

Still, you can’t afford to take short cuts when you exchange one debt obligation with a new one through a refinance.

Refinancings account for a growing segment of Australia’s housing finance market but in the US they’re huge. According to the US Mortgage Bankers Association, refinancings made up 79 per cent of all mortgages written in the US last year.

Many of these loan applications come from so-called ”serial refinancers”, who constantly search for the lowest possible interest rate. The same trend is emerging here with the rapid rise of mortgage brokers, who earn lender commissions for writing loans.

So don’t rush into refinancing, especially if you’re a first-timer.

Think seriously about your long-term plans and level of job security. It’s crucial to do your sums, too.

If, for example, the closing costs on an existing loan are $1000 but your monthly savings will be $100, you will break even in 10 months.

It’s easy to make errors. Paul Osborne, head of the buyer advocacy firm Secret Agent, urges people to be aware of hidden fees and other refinancing costs.

It’s also a mistake to deal only with one lender. ”Refinancing through the one bank can limit the options and benefits that competition brings,” Mr Osborne says.

”A buyer should speak with a quality broker who can look at the entire picture.”

Posted by Chris Tolhurst – The Age on 4th February, 2012