I’m more than a little surprised by the results of a survey we recently completed. We reviewed the situation of 1000 home owners who’d obtained a mortgage more than two years ago.
This is what we learned: 40 per cent of those surveyed said they had never refinanced. Another 19 per cent hadn’t refinanced in more than five years, 6 per cent had refinanced four to five years ago, 8 per cent had done so three to four years ago and 10 per cent had between two to three years ago.
This is the situation: interest rates are at their lowest in more 50 years, yet 83 per cent of Australians with a home loan have not refinanced in the past two years.
I find it hard to believe that so many people are avoiding action. The newspapers are full of stories about the historically low interest rates and the potential savings available to people with home loans.
It’s outrageous that people are still paying high interest when the opportunity to pay less is right under their noses. People take the time to drive to the cheaper grocery store just so they don’t pay an extra dollar for milk, yet when it comes to home loans they stick their head in the sand.
In effect, a failure to refinance to the best interest rate means you’re just handing the banks extra money. Reserve Bank of Australia data shows the benchmark 2 per cent interest rate is significantly lower than the average of 5.13 per cent that Australians experienced between 1990 and 2015. The all-time peak was at 17.50 per cent in January of 1990.
Because of certain business practices, most bank mortgage rates have not reduced in line with official interest rate reductions. A typical 2010 loan may today be on a current variable rate of around 5.3 per cent, whereas rates are now available at about 4.8 per cent, or better.
Even allowing for fees and transfer costs, it is likely that those on a home loan secured a number of years ago could make monthly savings by switching lender. For those who took out a home loan five years ago, the average rate after reductions would be 5.3 per cent. The potential savings on an average $350,000 loan with 25 years remaining could be thousands. For example, if you refinanced to a rate of 4.8 per cent, you would save $30,660 in interest over the remaining life of your loan.
There are lenders offering rates as low as 4.1 to 4.2 per cent, so your savings could be greater.
According to our survey, people avoided refinancing because they didn’t believe they’d save enough money, they thought the fees and charges would outweigh the benefits and they perceived the process to be too much of a hassle.
I just don’t buy this. With interest rates dropping to a low that no one in my generation would have thought possible, it’s crazy to not find out if you can save. If you don’t have the time or the expertise, speak to a mortgage broker and let them investigate a refinancing deal for you.
It’s also worth remembering that when interest rates do finally start edging up, those who already have the best home loan deals will have a natural buffer against interest rate rises.
At least our survey found that the younger generation are on the ball: 28 per cent of 25-34 year olds refinanced in the past two years compared with 13 per cent of 45-54 year olds.
Is this because young people are more internet-savvy and accustomed to comparison-shopping for the best price? Perhaps, and good on them.
If you’re in the majority and haven’t refinanced for years, let me leave you with this: a home loan is the largest monthly outgoing for most households, and if you’re paying too much – when interest rates are historically so low – you’re burying your head in the sand.