Repricing vs refinancing: could you save money in a rising-rate environment?

The Reserve Bank of Australia (RBA) has announced another hike to the cash rate in September from 1.85% to 2.35%.

This takes the total increase in the cash rate this year 2.25 percentage points, up from a record-low of 0.1% in May.

With this increase, we have seen interest rates for home loans increase across the board for both fixed and variable rates.

People with a variable-rate loan will already have felt the hit to their hip pocket, but there are options available to them to help save money.

For a start, there is the option to negotiate with the current lender to see if it can offer a lower interest rate, and if it can’t, comparing with others to see if it is worth the switch.

How much could you save with a lower interest rate?

From May until August, homeowners on variable-rate loans could have seen interest rate hikes of around 1.75 percentage points, depending on their loan. What does this look like in repayments?

If you had a $500,000 loan with monthly principal and interest repayments over a 30-year term and your interest rate increased from 3% p.a. to 4.75% p.a., your repayments would have increased from $2,108 to $2,608 - an increase of $500. If that loan was $1 million, repayments would have increased from $4,216 to $5,216 - an increase of $1,000.

So what difference can negotiating a lower interest rate make to your repayments?

Decreasing interest rates from 4.75% p.a. to 4.5% p.a. would reduce monthly repayments by:

$500,000 loan: $75

$1 million loan: $149

Decreasing interest rates from 4.75% p.a. to 4.25% p.a. would reduce monthly repayments by:

$500,000 loan: $148

$1 million loan: $297

When we look to get you onto a better rate, there are a number of ways we can go about it. First, we can look to negotiate with your current lender. Alternatively we can look at the broader market at over 60 lenders to see if you could be better served elsewhere. This is repricing or refinancing.

Repricing versus refinancing

When we negotiate with your current lender to get you on a better deal, that is called repricing. This can be a straightforward process and your interest rate or fees change, but the lender remains the same.

If we find you a better deal with a different lender and move you across, it is called refinancing. Many lenders offer lower interest rates to new customers, and/or cashback incentives where they offer money for you to move your loan to them. This will need to be weighed up with any potential fees charged in the change, so we will run the calculation for you and let you know if it would be beneficial for you over the longer term.

Beyond interest rates

Another thing to keep in mind is that interest rates aren’t the only way we could look to save you money. Lenders also charge fees depending on your deal. We can evaluate the current loan you are on and assess whether the features are still serving you. For example, if you have a package deal that includes a credit card and offset account, moving to a more basic loan that offers a free redraw facility could still suit your needs but potentially save you money in fees.