Refinancing
When Does Refinancing Actually Save You Money?
Refinancing can save you thousands, but not always. Here's how to work out whether switching your home loan makes sense, the costs to consider, and the questions to ask.
You've probably heard that you should refinance your home loan every few years to get a better rate. Sometimes that's true. But refinancing isn't free, and switching loans doesn't always leave you better off.
The real question isn't "should I refinance?" It's "will refinancing save me money, once I count all the costs?" This guide helps you work that out.
What refinancing means
Refinancing means replacing your current home loan with a new one. Usually that means moving to a different lender, but it can also mean switching to a different product with your current lender.
People refinance for different reasons:
- To get a lower interest rate
- To access equity for renovations, investing or other goals
- To consolidate debts, such as car loans or credit cards
- To change loan features, such as adding an offset account
- To change the structure, such as splitting the loan or fixing part of it
The loyalty tax
Many lenders offer their best rates to new customers. Existing customers often end up paying more than new ones, sometimes by a noticeable margin. This is sometimes called the "loyalty tax".
If you haven't reviewed your home loan in a few years, there's a good chance you're paying more than you need to.
Step 1: Compare your rate properly
Start by finding out your current interest rate. Then compare it to what's available for someone in your position, with a similar loan size and equity.
Keep in mind:
- Advertised rates aren't always the rates you'll get. Your actual rate depends on your loan size, LVR and situation.
- Compare the comparison rate. This includes most fees and charges, giving a better picture of the true cost.
- Ask your current lender first. Sometimes they'll lower your rate if you ask, especially if you mention you're considering refinancing.
Step 2: Count the costs of switching
Refinancing can involve several costs. Not every loan has all of these, but it's worth checking:
| Cost | When it applies |
|---|---|
| Discharge fee | Charged by your current lender to close the loan |
| Break costs | If you're on a fixed rate and leave before the term ends |
| Application or establishment fee | Charged by some new lenders |
| Valuation fee | Sometimes charged, often waived |
| Government fees | For registering and discharging the mortgage |
| LMI | If you're borrowing more than 80% of the property value |
Fixed rate break costs
If you're on a fixed rate, breaking it early can be expensive, especially if rates have dropped since you fixed. Always ask your lender for a break cost estimate before deciding.
Lenders mortgage insurance
If your loan is more than 80 percent of your property's value, you may need to pay LMI again with a new lender, even if you paid it on your original loan. This can wipe out any savings, so it's important to check your LVR.
Step 3: Work out your break-even point
Once you know the savings and the costs, you can work out how long it takes to break even.
Here's a simple example:
- Loan balance: $600,000
- Current rate: 6.4%
- New rate: 5.9%
- Saving: roughly $3,000 per year in interest
- Switching costs: $1,000
In this example, you'd break even in about four months. After that, the savings are yours.
If your switching costs were $8,000 because of LMI or break costs, it might take nearly three years to break even. That might still be worthwhile, but it's a different decision.
Step 4: Don't accidentally extend your loan
One common mistake is refinancing into a new 30-year loan term. If you've already paid off five years of your loan, starting again at 30 years means lower repayments, but you could end up paying more interest overall.
If you can afford it, keep your repayments the same, or choose a loan term that matches the time you have left. That way, you get the full benefit of the lower rate.
When refinancing usually makes sense
Refinancing is often worth considering when:
- Your rate is noticeably higher than what's available
- You're coming off a fixed rate and moving onto a higher variable rate
- Your property has increased in value and your LVR has dropped
- You need to access equity for renovations or investing
- Your circumstances have improved, such as higher income or reduced debts
- Your current loan is missing features you need, like an offset account
When it might not make sense
Refinancing might not be the right move if:
- You're on a fixed rate with high break costs
- You'd need to pay LMI again
- You're planning to sell soon
- Your income has dropped or become less stable
- The savings are small compared to the costs
In some cases, it's better to ask your current lender for a rate review, or to wait until your fixed rate ends.
What about cashback offers?
Some lenders offer cashback to attract refinancers. These can be helpful, but don't let a cashback offer distract you from the rate and features. A slightly higher rate can quickly outweigh a one-off cashback.
Refinancing to consolidate debt
Rolling car loans or credit cards into your home loan can lower your monthly repayments. But it can also mean paying off short-term debt over 30 years, which costs more overall. If you do consolidate, try to pay the extra amount off quickly.
Refinancing before a renovation or build
If you're planning a renovation or knock-down rebuild, refinancing can be a good time to restructure your lending. Our guide to knock-down rebuild finance explains how this works.
How Ridge Finance helps
Our team helps homeowners review their loans and work out whether refinancing actually makes sense. We:
- Compare your current loan against options from a range of lenders
- Calculate the real costs and your break-even point
- Check whether your current lender will reprice
- Handle the paperwork and switch, if it's worthwhile
We'll give you an honest answer. If staying put is better, we'll tell you.
We help homeowners across Melbourne's south-east, including Glen Waverley and Malvern East. Learn more about refinancing or book a free chat for a loan review.