How to take advantage of lower interest rates to protect yourself in uncertain times

On March 19 the Reserve Bank of Australia announced an emergency interest rate cut that reduced the cash rate to an unprecedented 0.25 per cent.

Not all lenders have as yet responded to the change, but initial announcements from a few have set the scene for a new environment of record low variable and fixed interest rate loans for residential borrowers.

Lenders have also adapted to the current COVID-19 situation so that in some cases you can now work with a Lending Specialist remotely to refinance your loan and even buy property.

Is now the time to refinance?

The current home loans on offer at the moment are at historic lows, according to Eric Greening, owner of LJ Hooker Home Loans Eastern Suburbs.

“Only a couple of months ago the cheapest headline rate started with a three,” he said. “If you look back to this time last year rates were in the high threes.

“For someone with a half a million dollar mortgage, that is in excess of $10,000 a year in savings. It’s never been a better time to refinance quite frankly.”

“You’ve got to remember that for the most part variable rates haven’t dropped a second time, they’ve only dropped once, and banks that have dropped them have only dropped 10-15 out of 25 basis points,” he said. “[The banks] have to keep a little bit of their powder dry to be able to offer those kind of incentives down the track if need be.”

But for those looking to take action now, Greening said mortgages have never been cheaper.

“These are the lowest consumer mortgage rates we have seen in history and with the cash rate being at 0.25 per cent, there’s not much further for it to go,” he said.

“Though we certainly don’t have a crystal ball, we’d suggest to everyone that it is not going to get much cheaper.”

Exercising caution

Greening warns that while it is good time to be approaching a lending specialist to look at options, borrowers should be careful to weigh up all the pros and cons presented to them, especially with fixed rates as they will come with limited features and flexibility.

“A fixed rate may look attractive but people also need to look at the overall comparison rate and fees. And as conditions improve the ability you have to pay off your loan quicker will be restricted. Australians have historically preferred variable rates due to the great flexibility. Fixed rates historically only account for around 15% of the market.”

Considering rates have dropped so much over the past 12 months, some borrowers may find themselves looking to break a previously fixed loan in order to refinance.

“Where people have fixed in rates of 3 per cent or 4 per cent, it is exceptionally expensive to break those,” Greening said. “You need to be able to have a clear benefit to and that may be possible with the current rates on offer.”

Mortgage stress

Refinancing to lower rates may give some borrowers relief in these uncertain times, but there are further steps that can be taken if livelihoods have been lost or put on hold due to coronavirus-related restrictions.

Lenders are currently assessing customers on a case-by-case basis if they have been affected.

“APRA has basically come out and said these are unprecedented times, and as such lenders need to adjust their policies in order to support their customers,” Greening said. “It is different from lender to lender, but most of them are doing payment holidays, whereby you put your loan on pause for three months, or six months and they can reassess in three months.”

In most cases, deferring repayments will mean the interest is capitalised. This means interest will continue to accrue, and will be added to the home loan balance, and will mean you’ll likely pay more interest overall in the long term. Lenders will either extend the total loan term by the length of time repayments were deferred, or slightly increase future repayments to account for the repayment holiday.

Customers may be able ask their lender to convert a loan to interest-only payments for a period of time.

Refinancing and social distancing

Given the current situation and restrictions around human contact, online access to a lending specialist has become easier. Remote ID can be completed via mobile platforms, forms can be signed electronically, and even loan documents can be delivered to borrowers digitally with digital signatures allowable.

“I think it is important for people to realise that even though we have these social distancing measures, you don’t have to put this on pause. There has never been a better time to refinance and doing it remote via a professional and accredited lending specialist makes more sense than ever.”

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