After a long cycle of rate hikes that began in May 2022, the Reserve Bank of Australia (RBA) has finally announced its first rate cut.
This decision brings relief to many homeowners, who are now faced with an important question: should I refinance now to take advantage of lower rates or wait in the hope of further cuts?
The answer depends on several factors, including your financial situation, potential savings and market conditions.
The recent rate cut of 25 basis points to 4.10% by the RBA marks a significant turning point after a period of aggressive rate hikes aimed at curbing inflation.
This initial cut signals a potential shift towards a looser monetary policy, offering some relief to borrowers who had seen their mortgage repayments rise substantially.
However, it is unclear how many more rate cuts will follow, or when. The RBA’s own forecasts suggest at least two more in 2025, with another cut in early 2026 to bring the cash rate to 3.40% by June 2026.
Other predictions are more aggressive. Speaking on NAB’s Forward View Broker Podcast, NAB chief economist Alan Oster predicted four cuts by February 2026, bringing the cash rate down to 3.10%.
While it’s uncertain how many more cuts will follow, this initial move suggests borrowers should carefully evaluate their options when deciding whether to refinance now or wait
Immediate savings
One of the biggest advantages of refinancing now is the ability to start saving on interest payments immediately. If your current mortgage has a higher interest rate, refinancing to a comparable loan with a lower rate can reduce your monthly repayments, freeing up cash for other financial goals.
Increased borrowing capacity
Lower interest rates can improve your debt serviceability, potentially increasing your borrowing capacity. This can be advantageous if you want to renovate your home, invest in property or consolidate other debts.
Debt consolidation
If you have multiple debts, refinancing can provide an opportunity to consolidate them into one manageable loan with a lower interest rate. This can simplify your financial obligations and potentially reduce the overall cost of your debts.
Potential incentives
Some lenders offer refinancing incentives, such as cashback deals or fee waivers. These vary according to your loan type and amount, but they can make refinancing now an attractive option.
Potential for further cuts
While the first cut is a positive sign, the RBA may continue to ease monetary policy if economic conditions warrant it. Waiting to refinance could mean you secure even lower interest rates in the future, maximising your savings.
That said, market forecasts aren’t guaranteed. The RBA’s monetary policy decisions are based on factors such as inflation, the labour market and global economic conditions, which can all change unexpectedly. If rates don’t fall as expected, borrowers who delay refinancing could end up paying more in the long run.
Market uncertainty
The property and financial markets remain uncertain, which could impact you in two key ways.
First, it is unclear how lenders will adjust their interest rates in response to RBA cuts. While most banks – including the big four – have passed on the cut to their clients in full, Finder.com.au research revealed a handful of lenders either haven’t passed on the cut or have stated their home loan rates will remain unchanged.
Second, the overall state of the economy remains somewhat volatile, with the RBA itself stating “the outlook remains uncertain”.
However, with uncertainty always present in the market, delaying a refinance based on ‘what-ifs’ can mean missing out on a more favourable deal today.
Costs of refinancing
Refinancing can incur costs like break fees, application fees and legal costs. If these expenses outweigh the potential savings from lower interest rates, waiting for a more substantial rate cut might be a better strategy.
Knowing the various pros and cons of refinancing immediately, it’s important to assess key financial and personal factors to ensure your decision suits your long-term goals.
Loan type
It’s important to compare your current loan type with the one you may refinance to. For instance, variable rates fluctuate with market conditions, meaning your repayments will change as interest rates do.
Loan-to-value ratio (LVR)
Your LVR, which represents the proportion of the loan amount to your property’s value, is an important factor when refinancing. If your LVR is high, you may need to pay lender’s mortgage insurance, which could offset the benefits of a lower interest rate. If your property value has increased, however, your LVR may be lower, making refinancing a more attractive option.
Credit score
Lenders will assess your creditworthiness when approving a refinance application. If your credit score has improved since you took out your current mortgage, you may qualify for more favourable loan terms. However, if your credit score has worsened, you might not be able to secure a better rate, making it worth waiting to improve your financial standing before refinancing.
Loan features
Interest rates are important, but they’re not the only factor to consider. Features like offset accounts, redraw facilities, flexible repayment options and the length of your loan term can impact your overall mortgage.
Financial goals
When deciding whether to refinance now or wait, consider your long-term financial goals. Refinancing might provide immediate benefits, but locking into a new loan without considering future needs could limit your financial flexibility. For example, if you’re planning to sell your property soon to upsize, refinancing now might not make sense. But if you’re looking to expand your investment portfolio, you may want to refinance now to access your equity.
Work with a professional
Before making a decision, consider speaking to a mortgage broker. Their knowledge and network can help you compare loan options and secure a loan that suits your current financial situation and long-term goals.
If you are wondering whether you should refinance now or wait, Shore Financial can help. To discuss your scenario, call us on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.
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