Refinancing Your Home Loan: When It’s Worth It
Refinancing can cut your rate, unlock equity, or consolidate debt, but only if the savings beat the costs. Here is how to tell, and how the switch actually works.
8 min readAustralia-wide
Refinancing simply means replacing your current home loan with a new one, either with your existing lender or a different one. Done for the right reasons it can save you thousands, shorten your loan, or free up equity for a renovation. Done reflexively, chasing a headline rate without counting the costs, it can cost you money. Here is how to weigh it up properly.
Refinancing is usually worth it when the interest saving over the next couple of years clearly beats the switching costs, when you want to access equity, or when you want to escape a rate that has drifted above the market, such as a lapsed fixed rate sitting on a revert rate. Always compare the true cost, including fees and any LMI, not just the advertised rate.
Good reasons to refinance
The most common is a better rate. Lenders reserve their sharpest pricing for new customers, so loyal borrowers often drift onto higher rates over time, a pattern sometimes called the loyalty tax. Refinancing resets you to a competitive rate. Other solid reasons include switching to a loan with features you now need, such as an offset account, accessing equity for renovations or investment, consolidating higher-interest debt into your lower home loan rate, or coming off a fixed term that has reverted to a high standard variable rate.
What it costs to switch
Refinancing is rarely free, so count the costs before you move. Typical ones include a discharge fee from your current lender, government fees to discharge and register the mortgage, and sometimes an application, valuation or settlement fee at the new lender. If you are on a fixed rate, break costs can apply. And if your equity is below 20 percent, you may have to pay LMI again, which often kills the deal.
Add up every switching cost, then divide by your monthly saving. That tells you how many months until you break even. If you plan to keep the loan well beyond that point, refinancing likely pays. If not, it may not be worth the effort.
How the process works
In practice it looks a lot like getting your original loan. You compare options and choose a lender, apply and provide income and expense documents, the new lender values your property and assesses your application, and on approval they pay out your old loan and register the new mortgage. Your repayments then simply switch to the new lender. A broker manages the paperwork and the timing so there is no gap or double payment.
The whole process commonly takes a few weeks. It is worth checking your borrowing power first, since serviceability is reassessed and rules can be tighter than when you first borrowed.
The equity and cashback angle
If your property has risen in value, refinancing can let you access some of that equity as cash, for a renovation, an investment deposit, or to consolidate debt. You are still borrowing it, so it needs to serve a sensible purpose, but at home loan rates it is usually far cheaper than personal or card debt.
Some lenders also offer cashback incentives to refinance. These can be genuinely useful, but treat them as a tiebreaker, not the main reason. A large cashback attached to a mediocre ongoing rate can cost you more over time than a lower rate with no cashback.
Traps to avoid
The biggest trap is extending your loan term back out to thirty years every time you refinance, which lowers your repayment but can increase the total interest you pay over the life of the loan. If you refinance to a lower rate, consider keeping your repayment the same so you pay the loan off sooner. Other traps include chasing a headline rate without checking ongoing fees, refinancing so often that costs eat the savings, and consolidating short-term debt into a thirty-year mortgage without a plan to pay it down faster.
Common questions
When is refinancing a home loan worth it?
When the interest saving over the next couple of years clearly beats the total switching costs, or when you need to access equity, consolidate expensive debt, or escape a rate that has drifted above the market. Work out your break-even point by dividing total switching costs by your monthly saving.
What does it cost to refinance?
Common costs include a discharge fee, government discharge and registration fees, and sometimes application, valuation or settlement fees. Fixed loans can incur break costs, and if your equity is under 20 percent you may have to pay LMI again. Always total these before deciding.
Will refinancing hurt my credit score?
A refinance involves a credit enquiry, which can cause a small, temporary dip. Applying to several lenders at once has a larger effect. Working with a broker to apply to the most suitable lender the first time keeps enquiries to a minimum.
Can I refinance to access equity?
Yes. If your property has grown in value, you can often refinance to release some equity as cash for renovations, an investment deposit or debt consolidation. You are still borrowing the money, so it should serve a sensible purpose, but home loan rates are usually far cheaper than other debt.
Should I refinance for a cashback offer?
Treat cashback as a tiebreaker, not the main reason. A large cashback on a loan with a mediocre ongoing rate can cost more over time than a lower rate with no cashback. Compare the true long-term cost, not just the upfront cash.
Wondering if refinancing stacks up for you?
A licensed broker can run the real numbers across lenders and tell you honestly whether it is worth it. Free to you.