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Why the wrong interest rate is costing you thousands of dollars

ByAndrew Mirams

It’s been an interesting few years in the finance realm with increasing interest rates, delayed cuts, rising property prices, cost-of-living challenges and general economic uncertainty all playing their part in the maelstrom.

The thing we see all too often is that complacency is compounded the problem for households who want or need to cut down on their costs. I would argue the place where households could get the greatest potential saving for devoted effort is in their finance arrangements.

What we have noticed, when we speaking to new customers is that up to 75% of homeowners are potentially paying an unnecessarily high interest rate? This level of self-sabotage is extraordinary, but the re is plenty borrowers can do to reduce their mortgage pain this year. 

Taking measures to reduce your loan repayments has a direct and positive impact – especially now as we deal with continuing cost-of-living pressures, a still too-high-for-comfort underlying inflation figure and a 4.10% interest rate that has only just begun to ease.

So, before 2025 goes any further, examine your mortgage agreement in detail and talk to a mortgage broker about refinancing. This term means switching to a new home loan or loan product with your existing lender (known as internal refinancing) or switching your loan to a new lender (externally refinancing).

Even a small decrease in your interest rate, as we have seen in the past week, can save you thousands of dollars and years in extra payments over the life of your loan – money that could be in your pocket.

Complacency is costing you money. Last year, Intuitive Finance saved one client over $28,000 on his loan because he hadn’t reviewed them for more than five years and thought he was on the best interest rate. We showed him otherwise.

Homeowners on a fixed-rate loan should not “set and forget” it either. There can be a range of excellent offering available in the market for these borrowers too as the landscape changes around interest rates and loan terms.

Australian’s may be renowned for having laid-back personalities, but finance arrangements require borrowers to be being active rather than complacent. The danger for homeowners who fail to regularly audit their arrangements is that they end up paying a “loyalty tax” to their lender.

I recommend a full review of your mortgage and other finances every two to three years at a minimum to ensure you don’t miss an opportunity.

Investors also need to understand the impact that interest-only and principal and interest loans can have on tax deductions. All homeowners must be aware of mortgage charges such as early payback penalties too.

The good news is that the mortgage and refinancing market is competitive right now.

As of September 2024, new borrower-accepted home loan commitments were valued at $30.21 billion – an annual increase of 18.9 per cent, according to Australian Bureau of Statistics (ABS) figures.

And, the best news is, Intuitive Finance can do the hard yards of lender negotiations for you, thereby saving you money and time.

Choosing a refinance type

An internal refinance may save you costs that an external refinance could involve, such as exit fees (for home loans written before July 1, 2011); application or establishment fees; and valuation fees. But even an internal refinance will need to be negotiated as lenders won’t hand a refinanced loan to you easily, especially when it comes to a lower interest rate.

If you’re considering an external refinance, you’ll need to have all the paperwork that you had on hand for your existing loan by your side again. You’ll also need pre-approval from the new lender and a good credit score.

Don’t be fooled by the attraction of a refinanced loan’s lower interest rate either as it can hide higher, long-term costs or other issues than your existing loan.

As I mentioned earlier, customer loyalty – whether it’s for a home loan or utility plan – is generally taxed, not rewarded. Existing customers over time tend to pay a higher interest rate as compared to what new customers can get from the same lending institution. This is because existing customers get complacent and stick with a current lender where they’re familiar with their standing loan’s structure and terms. This extra higher interest rate is often referred to as a “loyalty tax” in our industry.

In an Australian Competition and Consumer Commission (ACCC) report released in December 2020, the consumer watchdog found that borrowers with home loans between three and five years old paid an interest rate of about 58 basis points higher than those paid for new loans. 

Luckily for existing home owners, their interest rates and those of new borrowers are now almost the same, according to RBA figures in February 2024. The 0.9 per centage point difference between the two loans is the lowest in five years.

Customers often ask, “Can I refinance a fixed-rate loan?” The answer is yes, you can but you will need to pay a “break” fee, on top of discharge and other fees.

Lenders charge this fee to recuperate costs they incur when fixed rate agreements are broken and it may outweigh the savings you make on a refinanced loan.

But it could still be worth your while to refinance so talk to your mortgage broker about your options.

When and how often should I refinance?

With most mortgages set to 25 to 30 years, homeowners will probably refinance several times over the life of their loan. But broadly speaking, a refinance within the first one to two years of a mortgage settlement is not financially worth it due to the costs involved.

At the other end of the scale, refinancing too often – particularly externally – will impact your credit score.

Longer term, a regular audit of your mortgage will usually decide this question for you.

Accessing lower interest rates or other loan products such as a redraw facility or offset account are the most popular reasons to refinance.

You may want to access your home’s equity to purchase an investment property or undertake a renovation, although you may not need to refinance to do this.

Alternatively, you may be undergoing a lifestyle change or you’d like to consolidate your debt. 

Homeowners nearing the end of their fixed-term loan should always refinance.

Otherwise, their loan will automatically switch to the lender’s standard variable rate, which can be higher than other deals on the market.

Getting the best possible outcome from your loan arrangements requires a vigilance, and that is best achieved by having a specialist, experienced mortgage broker on your side.

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Andrew Mirams
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