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Should You Refinance to Another Bank to Get a Better Interest Rate?

You’ve got a fixed-term account maturing soon and the bank or your broker has sent you some interest rates. Maybe your current bank is offering 0.1% higher than another bank in the market; should you refinance your mortgage to get the better rate?

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What does 0.1% interest rate difference mean in real numbers?

In theory, it should always make sense to move to a cheaper bank however, even with very large dollar numbers, and very small interest rate percentages, the first calculation we need to do is find out if it is worth the bother.

0.1% means for every $100,000 that you owe to the bank, you will pay an additional $100 per year or just under $2 per week.

In other words, a $700,000 mortgage would save $700 per year by moving to another bank that was offering 0.1% less. If the difference is 0.2% it might start to get a little more tempting at a saving of $1,400 over the year. Except…

What costs are involved with refinancing to another bank?

You’ll remember from when you bought your property that you needed a solicitor to review the mortgage documents as well as updating the title. This is true when refinancing too. The typical cost for a solicitor to refinance a mortgage ranges but $1,500 would be a good estimate for most houses. In the example above, the savings for a $700,000 mortgage with a 0.2% cheaper rate was $1,400 meaning you wouldn’t even break even by refinancing. This is before you even account for the value of your time for applying for a mortgage and swapping all your accounts over to the new bank. And speaking of time…

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Timing issues

Advertised interest rates from the banks are subject to change without notice. In fact, banks specifically don’t give notice to avoid major rushes. Imagine if the public heard an interest rate was going to go up tomorrow at a bank; every applicant would try to call the bank that day. Interest rate announcements are typically done at 5pm and are enforced from that day.

The problem here is that mortgages take a couple of weeks to process. By the time you’ve got all the documents together, submitted your full statement of position to the bank and waited for them to approve the loan, it’s likely any interest rate differential could have moved or even reversed. Chasing an advertised rate at another bank can often be an exercise in futility as rates change very, very often.

So when would you refinance?

There is a time when it might be worth considering refinancing but it isn’t because one bank is offering a slightly cheaper interest rate.

Hopefully, when you first joined your current bank, you received a cash contribution. This would typically be a lump sum of cash that thanks you for joining the bank. At the time, you will have signed a document to say that if you leave the bank within “x” number of years, you will need to repay this cash amount. Typically the number of years is 3-4 years.

But if you’ve been with the bank for longer than that, you can refinance to another bank who will now offer you a new cash contribution to come across to them.

To use the example above, a $700,000 mortgage will save $1,400 in interest (0.2% savings) but have to pay a Solicitor ~$1,500 to refinance. However it’s possible a new bank will offer about $4,900 in cash to come over to them. That’s a total benefit of $4,800 for refinancing. Assuming the homeowner is out of the contracted repayment period for their current bank, this may be enticing to move across to a new bank.

Check out our article Re-Fixing Your Interest Rates - Should you wait? for related information. Or contact one of our advisers for advice specific to you.


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