Refinancing makes sense when the savings from the new loan outweigh the cost of switching and the benefits you give up. That test applies whether you are moving lender or changing loans with your current one.
The timing matters as much as the rate.
When Is the Right Time to Refinance a Home Loan?
The right time is when a clear trigger exists and the numbers show a net saving after all costs. Common triggers include a fixed rate period ending, a rate that has drifted above what lenders now offer, a change in your income or goals, or a need for features your loan lacks.
ASIC's responsible lending guidance expects a switch to deliver overall cost savings that outweigh any lost benefits, or to better meet your requirements and objectives. Those savings must account for fees and charges, including any broker fees. The same test is a sound one for you to apply yourself.
A regular loan health check is a practical way to spot these triggers early, rather than waiting for a bill to prompt you.
What Happens When Your Fixed Rate Period Ends?
When a fixed rate expires, your loan usually reverts to a variable rate unless you choose another option. Check your contract and your lender's notice. This is the most predictable moment to review your loan.
You can then compare staying with your lender, moving to another fixed or variable rate, or splitting the loan. Our fixed rate expiry page explains the options in more detail. Reviewing a few months ahead gives you time to compare and to arrange a refinance without rushing.
Breaking a fixed loan early is different. A break fee can apply if you end a fixed rate loan before its term finishes, and it does not apply to variable loans. Waiting for expiry can avoid that cost.
What Are the Pros of Refinancing?
The main advantages are a lower interest rate, lower repayments, better loan features and access to equity. Each is worth having only if it suits your situation.
- Lower rate: a reduced rate can cut repayments without borrowing more. ASIC regards a refinance to a lower rate, with a sound repayment history and no adverse change in circumstances, as likely to be suitable.
- Features: an offset account or redraw facility can reduce interest or give you flexibility, depending on how you use them.
- Equity: a larger loan can release equity for renovations or an investment purchase.
- Consolidation: rolling other debts into your mortgage can lower the repayment, but you will usually pay more interest over the longer term, and the debt becomes secured against your home.
What Are the Cons and Costs of Refinancing?
The main costs are break fees on fixed rate loans, discharge fees, application fees, possible lenders mortgage insurance, and the risk of paying more interest over time. These can erase a small rate saving.
Moneysmart lists the usual costs of switching as a break fee on a fixed loan, a discharge fee, a new loan application fee and, for an internal refinance, a switching fee. If you have less than 20 per cent equity, lenders mortgage insurance may also apply. Fees vary by lender, so ask for them in writing.
Victoria abolished mortgage duty from 1 July 2004, so it is not a cost for Victorian mortgages.
Two further risks deserve attention. First, a new lender must assess you under current criteria, and some borrowers who qualified years ago no longer meet them. Second, if repayments fall only because you have restarted a longer term, you will pay more interest over that term. ASIC says you should be told this clearly.
Refinance Example: Lower Repayments, Higher Interest Over Time
A longer term can lower repayments while raising total interest, so the repayment figure alone is a poor guide. The example below uses an illustrative rate of 6.75% p.a., not a current offer.
Consider a borrower with $500,000 remaining over 20 years at 6.75% p.a. The repayment is about $3,802 a month. They consider refinancing to a new 30-year term at the same illustrative rate. The repayment falls to about $3,243 a month, which is a saving of roughly $559 a month and helps cashflow.
The cost is time. Over 20 years they would pay about $412,500 in interest. Over 30 years the figure rises to about $667,500. The better course was to refinance to a lower rate, then keep making the original repayment. That shortens the loan and retains the interest saving.
You can test your own numbers with our mortgage repayment calculator.
Refinancing to Release Equity: What to Weigh First
Releasing equity means borrowing more against your property, and it increases your debt. It can fund a deposit on the next property, but the extra loan carries interest and affects your borrowing capacity.
APRA does not treat a refinance that adds debt as like-for-like. Your lender will assess the larger loan under its serviceability buffer, and a valuation will set how much equity is available. If you are considering investment loans, tax matters too.
The ATO says interest is deductible only on borrowing used to produce income. If you refinance and use some funds privately, interest must be apportioned, and that ratio applies for the life of the loan. Please speak with your accountant before you restructure, as the outcome depends on your circumstances.
Does Staying Put Ever Make More Sense?
Staying with your loan makes sense when the saving is small, when you would lose a valuable feature, or when fees would take years to recover. It also applies to some government-backed loans.
As an example, a borrower in the Australian Government 5% Deposit Scheme who refinances to a lender outside the scheme loses its benefit. They may then face lenders mortgage insurance if their loan is above 80 per cent of the property's value. Cost, not rate, decides the question.
Before deciding, ask your current lender to review your rate. A call can sometimes close the gap without a full switch, although outcomes vary by lender. Our refinancing team can compare both paths.
Frequently Asked Questions
When should I refinance my home loan?
Refinance when a clear trigger exists, such as a fixed rate ending or a rate above what other lenders offer, and the saving exceeds all switching costs. Compare the total cost, not just the rate.
Are there fees for leaving my lender?
Exit fees on residential loans entered after 1 July 2011 are generally prohibited. Break fees on fixed loans, discharge fees and application fees can still apply, so ask your lender for them in writing.
Does a longer loan term save money?
It lowers repayments but usually increases total interest. In our illustrative example at 6.75% p.a., moving from 20 to 30 years cut the monthly repayment but added significant interest.
Is interest on a refinanced loan tax deductible?
Only interest on money used to produce income is deductible, and any private use requires apportionment. Speak with your accountant about your situation.
