Refinance when changing your loan leaves you better off after costs, not just when another lender advertises a lower rate.
A lower rate can be a good reason to review your home loan, but fees, the remaining term, features and your plans all affect whether switching is worth it. Here’s how to tell when it makes sense, what it costs and how to review your loan before you decide.
What does refinancing a home loan mean?
Refinancing means replacing your existing home loan with a new one, either with a different lender or, in some cases, a new loan with your current lender.
People refinance for different reasons: a lower interest rate, different loan features, a structure that better suits their circumstances or a way to access usable equity.
Refinancing isn’t the same as asking your current lender for a better deal. A rate reduction or product change may improve your position without moving the loan. That’s why the review comes first: understand what needs to improve, then decide whether refinancing is the best way to achieve it.
What are the signs it might be time to review your home loan?
You don’t need to wait for a major rate change. A review can make sense whenever something changes in the loan, the market or your own plans.
Your rate is no longer competitive. If comparable loans are available at lower rates, check whether your deal still stacks up after costs.
Your fixed rate is ending. Moving to a variable rate can change your repayments, which makes this a natural point to review.
Your financial situation has changed. A higher income, lower debts, different household expenses or a new family situation can all affect which loan structure suits you.
You need different features. An offset account, redraw, repayment flexibility or a different fixed and variable mix may be more useful than what you originally chose.
Your equity has changed. Increased equity may widen your lending options, although a lender will still assess your borrowing capacity and other credit criteria.
You’re planning your next move. Renovating, buying another property or upgrading can all be reasons to check that your mortgage is structured appropriately.
You haven’t reviewed it for a while. That alone can be reason enough to check it still suits where you are today.
There’s no set timetable, and you don’t need to refinance every year. Review periodically and whenever something meaningful changes. A review may show that your loan is still appropriate, that your current lender can improve the deal, or that changing the structure would be more useful than changing lenders.
Is a lower interest rate enough reason to refinance?
Not necessarily. The rate is only one number, and three other things can outweigh it.
Switching costs. Discharge fees, application or settlement fees, valuation costs, fixed-rate break costs and other charges may apply, depending on the loan and lender. If the saving is small, it takes longer to recover them.
The remaining term. If you have 20 years left on your mortgage and refinance into a new 30-year loan, your repayment may fall partly because the debt is being repaid over a longer period. That can increase the total interest you pay.
For illustration, take a $400,000 balance at 6% p.a. in both cases. Over 20 years, repayments are about $2,866 a month and total interest is about $288,000. Stretched over 30 years, repayments drop to about $2,398 a month, but total interest rises to about $463,000.
Features. A cheaper loan may not be better if you lose an offset account, repayment flexibility or other features you use.
So rather than asking only “Is the new rate lower?”, ask whether the new loan improves the overall cost, structure and flexibility of your mortgage.
What does it cost to refinance a home loan?
Costs vary with your existing loan, the new lender and the structure you choose. Possible costs include:
- From your current lender: discharge or termination fees, and a break cost if you leave a fixed-rate loan early.
- For the new loan: application or establishment fees, settlement costs, valuation fees and ongoing package fees.
- Government charges: government fees or registration charges, where applicable.
- LMI: depending on your new loan-to-value ratio (LVR) and lender policy, lenders mortgage insurance may become a cost to consider.
Not every refinance involves every fee. Add up the total switching cost, because you’ll need it for the next step.
Some lenders may offer cashback incentives for refinancing, which can offset part of the cost. Check the conditions, including whether any amount must be repaid if you leave within a set period.
How do you know if refinancing is worth it?
Refinancing is worth considering when the benefits outweigh the costs and the new structure better suits your circumstances. Compare your current loan with the new one side by side:
| What to compare | What to check |
|---|---|
| Rate and repayments | Is the saving meaningful once the loan term is the same? |
| Remaining term | Is the new term similar to what you have left, or longer? |
| Fees | Upfront and ongoing, including any package fees. |
| Features | What you’d gain, and anything you’d lose, such as an offset account or redraw. |
| Fixed or variable | Does the structure suit your plans, and would break costs apply? |
| Switching costs | The total from the section above. |
| Future plans | Any effect on borrowing for your next purchase or renovation. |
One simple measure is the break-even period. If refinancing costs $1,000 and is expected to save about $100 a month, it would take roughly 10 months to recover the cost. That’s useful, but it shouldn’t be the only test.
Look beyond the first year. A lower repayment is less attractive if the term is extended, important features are lost or the loan doesn’t fit what you plan to do next. What matters is whether the new loan leaves you in a better position overall.
When might refinancing not make sense?
Refinancing won’t suit every borrower, even when a lower rate is available. It may be less attractive if:
- the cost of switching is high relative to the likely benefit, including fixed-rate break costs, lender fees, discharge costs or potential LMI
- you expect to sell the property or make another major change to the loan soon, leaving too little time to recover the costs
- the new loan substantially extends your repayment term
- your current loan is already competitive and has the features you need
- a new lender may not approve the amount or structure you want, because refinancing involves a fresh lending assessment
What will a lender assess when you refinance?
Refinancing is a new credit application, so a lender reassesses your finances rather than simply taking over your existing mortgage. It will usually look at your income, living expenses, existing debts and other commitments to assess whether you can service the new loan, along with your credit history and how the loan is structured.
It will also consider your property’s value and the amount you want to borrow. This sets your LVR, which can affect the loans available, pricing and whether LMI applies.
Substantial equity doesn’t guarantee approval. Lending policies differ, so the same borrower may not get the same assessment or options from every lender.
How should you approach a home loan review?
A useful review starts with what you have today and works forward from what you need.
- Start with your current loan. Know the balance, interest rate, repayments, remaining term, fees and key features.
- Identify what has changed. Look at your income, expenses, equity, household circumstances and property plans.
- Decide what needs to improve. That might be the overall cost, features, flexibility, structure or support for a future property purchase.
- Compare the options. Look at staying, renegotiating, restructuring or refinancing, using the comparison points above.
- Get the options compared, then decide. Ask your current lender what it can offer, and consider a broker who can compare options across multiple lenders.
At The Finance Architect, the aim isn’t to find a reason to refinance. It’s to work out which option best fits where you are now and where you’re heading.
Refinancing FAQs
How do I know if it’s worth refinancing my home loan?
It may be worth refinancing if the benefits outweigh the switching costs and the new structure better suits your circumstances. Compare the rate, fees, remaining term, repayments, features and future plans, not the rate alone.
How often should I refinance my home loan?
There’s no set timeframe. Review the loan periodically and when something meaningful changes, then refinance only if changing the loan improves your position.
Can I refinance with my current lender?
Yes. Refinancing can involve moving to a new loan with your existing lender, and sometimes a lender may simply improve your rate or change the product without a full refinance. Compare its offer with other lenders before deciding.
How much equity do I need to refinance?
There’s no universal minimum. Your property value, loan balance and resulting LVR can affect the products available, pricing and whether LMI applies. The lender will also assess your borrowing capacity and other credit criteria.
Does refinancing restart your home loan?
It can if the new loan is set up over a fresh term, but it doesn’t have to. Compare the new loan using a similar remaining term, so you can see the effect of the refinance without confusing it with a longer repayment period.
Can I refinance a fixed-rate home loan?
Yes, but leaving before the fixed period ends may involve break costs or other restrictions. Check those costs before deciding whether to change the loan early.
Does refinancing affect my credit score?
A refinance is a new credit application, so the lender will usually make a credit enquiry that may appear on your credit report. Before applying with several lenders, check the implications with your broker or lender.
How long does refinancing take?
It varies by lender, the complexity of your situation and how quickly you provide documents. Ask your broker or lender for a realistic timeframe, and avoid leaving it until a fixed-rate period is about to end.
Can I use refinancing to access equity or consolidate debt?
Possibly, depending on your equity and the lender’s policy. But borrowing more increases what you owe, and rolling shorter-term debts into a home loan can mean paying interest on them for longer. Consider the total cost before deciding.
Your home loan review
The right time to review your home loan isn’t automatically the right time to refinance it. Start with what you have today, what has changed and what you need the mortgage to do next. Then see whether staying, renegotiating, restructuring or refinancing gives you the strongest overall position.
Thinking about reviewing your home loan? Book a Discovery Call with Dale to work through your current position and the options available.
