Mortgage Interest Rate Rises and Refinancing Tips

As homeowners come to terms with yet another cash rate hike, your lender has probably already notified you of an increased interest rate for your mortgage.
For people with home loans in Sydney, understanding how market interest rate hikes affect you and exploring the options like mortgage refinance can help.

The home loan process explained

Sydney first home buyers will find that securing a home loan is the first hurdle to entering the property market. It can be challenging, given increases in property prices, for newcomers to enter the market.

When applying for a home loan, here are some of the steps you will need to take:

Interest Rate Hikes r

In November, the Reserve Bank of Australia announced another rate hike, taking the cash rate to 4.35%. Although this was the first increase in a few months, interest rates are at a 12-year high following consistent increases in 2022 and 2023.

While these rate hikes are indicative of wider economic trends such as inflation, employment rates and global market conditions, they directly affect people with mortgages as well. When the RBA announces a change in interest rates, lenders generally follow suit to keep up with the cash rate

Home loan rates

For existing homeowners with variable-rate mortgages, a rise in interest rates translates to increased monthly mortgage repayments. This can strain household budgets and prompt borrowers to look for more affordable alternatives, possibly considering mortgage refinancing.
In fact, over the last year refinancing activity has been high, with the Australian Bureau of Statistics reporting that refinancing activity peaked in July 2023 but remains much higher than any other time over the last few decades as shown in the graph below.

Refinancing as a Solution

A mortgage refinance is the process of replacing an existing loan with a new one. This new loan may include different terms such as new interest rates, payment schedules or loan duration. 

Like your existing loan, the refinance home loan rates and terms offered by your new lender will vary according to the type of loan you take out, your creditworthiness, the value of the property and any equity you already have.

Homeowners choose to refinance for a number of reasons. Some common reasons for refinancing in Australia include:

  • To get a lower interest rate: Lenders may offer more competitive rates to refinance.
  • To pay less in ongoing fees: Depending on the terms of your loan, you may be able to save in what fees you owe.
  • To add features: This can include the ability to make additional payments, an offset account or redraw facility.
  • To access the equity in your property: Borrowers can also use mortgage refinance as a means of accessing accumulated equity, which is the difference between the value of your home and what you owe on your loan. In order to access this equity to buy a new property or undertake renovations, you may need to refinance. This is known as a cash out refinance. 

Rates of refinancing a home loan

Consider speaking to a mortgage broker in Sydney who will try to find competitive rates for refinancing your home loan that align with your financial goals.

Refinance home loan rates can be lower than existing loans. This is because lenders use these more competitive rates as a means of attracting your business. In some cases, borrowers have also improved their creditworthiness by demonstrating their ability to pay back their mortgage.

Your mortgage broker will also be able to provide advice on what type of loan to opt for. For borrowers who have a variable-rate mortgage, interest rate hikes can hit hard as your interest rate fluctuates with the market. In these cases, refinancing to a different type of loan or a loan with a lower interest rate may be an option you can consider.

What to consider before refinancing

While refinance home loan rates might look appealing, there are some factors to refinancing you should consider carefully before you start the process.

It is recommended you consult with a mortgage broker in Sydney before you begin who will be able to advise on the refinance process in line with your financial situation and goals.

Refinancing costs

Your new loan may require upfront fees such as a loan application fee or property valuation fee if you’re refinancing to access equity. Or, you may be required to pay break fees if you’re exiting a fixed-rate home loan early. 

Lending criteria

You will need to meet the criteria of your new lender regardless of what refinance home loan rates you are getting. If your financial situation has changed, your income has decreased or you have more expenses, you may not meet the criteria for a loan.

Home equity reductions

Accessing home equity through a cash out refinance will reduce the amount of equity in your home, potentially leaving you with less of a cushion in case of a market downturn or unexpected financial challenges.

Tips for effective Refinancing

When opting to refinance, the process is similar to when you took out your existing loan. Here are some tips for homeowners considering refinancing your home loan in Sydney:

Outline your financial goals

Determine whether your aim is to save money with lower monthly payments, to pay off your loan sooner or to tap into home equity.

Contact a mortgage broker

Use a mortgage broker in Sydney to help facilitate the process, shop around for loan options and get advice on how to achieve your financial goals.

Compare offers carefully

Examine your refinance home loan rates carefully, in comparison to both your current terms as well as options from other lenders. 

Consider the loan duration

While rising interest rates may make your repayments increase, the length of the loan also plays a role in determining what rate the lender offers you. Speak to your mortgage broker about shorter loan durations and whether this may suit you.

Interest rates and refinancing

Mortgage refinance may be an opportunity for homeowners to secure more competitive rates, reduce fees, access equity or add beneficial loan features. Working with a mortgage broker in Sydney will help you understand the options and see alternatives that are tailored to your financial needs and goals. 

For competitive home loan refinance rates, it is helpful if you define your financial objectives beforehand and compare offers throughout the process. Making informed decisions about a mortgage refinance can help you through market rate fluctuations.

Ready to explore refinancing in response to an interest rate hike? Contact Loan Station today, an experienced finance broker in Sydney, ready to find solutions tailored to your financial goals. 

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