Is It a Good Time to Refinance When Interest Rates Are Low

A refinance when interest rates are low or falling can be a smart financial decision, but it may not always be the right one. We help with the answer to “Is it a good time to refinance when interest rates are low”? Some homeowners fail to act when interest rates are low, possibly missing out an opportunity to save thousands over the life of their mortgage. This can be a good decision, although there are many factors you need to consider before doing so, because the true answer to “is it a good time to refinance when interest rates are low”, is “maybe” you should, but “maybe” you should not. Knowing when to act, what to look out for, and how to structure your mortgage could mean the difference between thousands saved or thousands lost unnecessarily.

In this article, we’ll examine why it’s worth considering refinancing your mortgage when interest rates are low. We will also look at the pros and cons this could involve.

Why Interest Rates Matter When Refinancing

Interest rates could have a huge impact on the cost of your mortgage. When rates fall below the current rate you are paying on your fixed or floating rate, refinancing could offer lower repayments, increased savings, or the chance to access equity for other goals.

Benefits of Refinancing in a Low Rate Environment

Here are several of the advantages refinancing a loan can offer you:

• Lower monthly repayments: Reduced financial pressure and more disposable income
• Interest savings: A lower rate over 20-30 years could save you thousands
• Refinance opportunities: Review your mortgage structure for better terms

Additional advantages include:

• Take advantage of another bank’s products, services, or cashback offers
• Build up an emergency fund
• Borrow money for renovations or investments
• Cash out your equity for vacations, weddings, or asset purchases
• Avoid putting all your eggs in one basket
• Switch from a non-bank lender to a mainstream bank
• Switch away from a bank offering a poor service

If you are ready to take the next step, explore our mortgage refinancing guide for a walkthrough of the process.

Timing Is Key

Just because rates drop does not mean you should rush to refinance. You must balance potential savings with timing risks, such as:

• Break fees: Leaving a fixed term early may cost thousands
• Market Conditions: If rates are volatile, waiting a bit could offer better deals
• Personal Plans: Are you considering selling, renovating, or expecting a change in income or circumstances?

Smart Refinance Strategies in a Low Rate Market

Some key refinance strategies tailored to a low-rate environment includes:

1. Shorter Loan Term

Use low rates to refinance into a shorter term with higher repayments, a faster loan payoff results in big savings in interest over the period.

Illustrative simplified example: A $400k mortgage x 6.45% interest rate is $744k interest paid, versus a $400k mortgage x 5.75% interest rate is $460k interest paid. So, the interest savings at the lower rate and a shorter term, is $314k over the life of the loan, based on interest only calculations.

2. Restructure to Reduce Risk

Splitting your loan between fixed and floating rates. This provides flexibility yet provides a portion of your loan at a locked rate. The structures will depend entirely on your personal goals and individual situation.

3. Debt Consolidation

Lower interest rates make it an ideal time consolidate high interest debt into your mortgage, since short term loans are at a higher rate than your mortgage.

Illustrative simplified scenario based on interest only calculations

• Mortgage ($400k at 5.75% interest) = $1,916.67
• Car loan ($20k at 8% interest) = $133.33
• Credit Card ($10k at 12% interest) = $100.00
• Total is $2,150

After consolidation, the mortgage is $430k at 5.75% = $2,060.42, thereby saving $89.58 per month. Note this will be short term savings only since the loan term on all debt is now increased.

To learn more about which strategies are best suited under which scenarios, visit our recent article and compare refinance strategies.

Risk Mitigation Tips

Refinancing is not risk free and you should avoid the following to avoid costly mistakes:

• Calculate your break-even point: Will the savings be more than the offset fees?
• Check total cost, not just the rate: Consider hidden fees or term extension impact
• Review your fixed rate expiry date: Time your switch as close as possible towards the refix dates
• Seek advice: Contact your trusted adviser to help assess whether the benefits outweigh the costs.

FAQs: Low-Rate Refinance

• What if rates keep dropping after I refinance? That’s loan structure and flexibility are important
• Is it worth refinancing for a small rate cut? Possibly, and depends on the break fees and loan amount
• Can I refinance multiple times? Yes, but it’s best to review your mortgage every 2 years, unless its financially beneficial.

So, refinancing when interest rates are low can be a strategic move, but it needs to be part of a well thought out plan. Just because interest rates are lower, it does not mean that you should automatically look at refinancing your mortgage.

Talk to our trusted advisers to find out if now is the right time for you.

Ask Yourself: Why Are You Refinancing?

• Has your rate expired and you are looking at a lower rate?
• Are you wanting funds for renovations?
• Do you want to want to switch from a non-bank lender to a bank?

Understanding your why will help us structure the right refinance for your goals.

As you can see, switching your home loan can be a big decision.  A Mortgage Broker from Platinum Mortgages can help you work out if this is the right choice for you. Rates are changing yes, however its important you are able to make an informed decision. We can assist you with weighing up the pros and cons of making a switch.  We make sure you end up with the best loan for your needs.

To learn more, please contact us at 0800 LENDING today.