It’s time to get interest rate savvy.

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Now that interest rates are on the rise it pays to be extra smart when it comes to refinancing.

Melbourne mortgage broker Andrew Rennie from Helping Hand Finance says while you may be able to find a better interest rate than the one you’re currently on, the cost of making the switch should always be taken into account.

“There’s always going to be a short-term cost,” he says.

While some lenders will waive application or settlement fees you are likely to be hit with discharge fees from your outgoing lender. There are also non-negotiable state government fees usually worth a few hundred dollars.

“If it costs you $600 or $700 to save yourself $20 or $30 a month then you’ve got to do the sums and say, ‘is it going to be worth it over that sort of period of time’?” he says.

Helping Hand Finance mortgage broker Andrew Rennie.

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THINKING LONG TERM

If you do decide to refinance, it’s important to think ahead. If you refinance a loan where part of the loan term has already elapsed, keeping the new loan at the shorter term rather than pushing it back out to 30 years could save you thousands in interest over the life of the loan.

Canstar Data Insights director Sally Tindall says while re-extending the loan term offers short term relief it comes at a significant cost over time.

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Canstar Data Insights director Sally Tindall. Picture: supplied

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“For example, if someone had $600,000 owing and 25 years remaining on a rate of 6 per cent, and they refinanced down to a competitive rate of 5.25 per cent they would see their monthly repayments drop by $270 and, over the remainder of their loan, pay more than $80,000 less than if they’d stuck with their old lender, including $1,150 in switch fees,” she says. “If they instead push their loan term back out to 30 years, their monthly repayments would drop by $553 – that’s $282 more than if they’d kept their loan term the same – but over the remainder of their loan, that is three decades, they’d pay $121,064 more than if they’d refinanced and kept the loan term the same. In fact, they’ll even pay $40,169 more than if they’d done nothing at all.”

First Choice Mortgage Brokers principal adviser Tony Bice.

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SPLITTING YOUR LOAN

Sydney broker Tony Bice from First Choice Mortgage Brokers says when refinancing to get extra cash out for a car, it’s useful to consider separating that portion of the loan into a shorter term.

“Cars depreciate after five years,” he says, “If you throw $50,000 on top of your home loan, your car’s gone in five years, but guess what? You’ve still got that $50,000 that you’re going to be paying interest over the term of the loan.”

If you’re looking to upgrade your car, why not consider splitting your loan into two portions? Picture: Richard Walker

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If you keep your home loan portion over 25-30 years and your car portion over just five, you can clear the interest related to the vehicle much sooner and more in line with its usual depreciation.

Similarly, if you choose to consolidate credit card and/or personal loan debt into your home loan as part of a refinance, splitting the loan into a home loan portion and a personal debt portion can enable you to pay off your personal debt over a shorter time frame, Rennie says.

Finder’s Graham Cooke. Picture: Supplied

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COVERING YOUR COSTS

Finder head of Consumer Research Graham Cooke says, according to Finder research, the lowest market rate is often about 25 basis points below the average.

“This means you can effectively give yourself a rate cut simply by refinancing,” he says.

At the time of writing, he says there are “more than 10 cashback or points-back offers in the market, with some providing upwards of $2,000 if you switch.”

“I have had colleagues switch to a loan at the same rate just to unlock the cash,” he says.

He says it’s important to check if your current lender will impose any penalties for doing so. However, depending on the offer, a lender cashback could at least potentially cover the cost of the refinance to a better rate.

Refinancing to a lender with a sharper rate that offers a cashback could help you save. Picture: Kelly Barnes.

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3 WAYS TO PREPARE FOR FURTHER RATE HIKES

With all four major banks tipping another rate hike in May, and two even forecasting one this month, Finder’s head of Consumer Research Graham Cooke offers three steps borrowers can take now to prepare.

* Sharpen your rate – try for the lowest rate you can get, whether through refinancing or negotiating with your current lender. Keep in mind the terms and conditions of the lender and what your borrowing capacity will allow

* Stress-test your budget – calculate what your monthly repayments will look like if rates rise another 1-1.5 per cent. Figure out what discretionary spending you can cut now before things get tight

* Consider an offset – maximising an offset account to lower the interest charged on your principal may be beneficial while rates are rising if you have a decent chunk of savings at hand

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