The RBA has raised the cash rate five times this year, and the big four banks are passing the latest rise on to variable loans from 13 November. If your repayments are climbing, it’s a fair time to ask whether your loan is still the right one.
To refinance means moving your home loan to a new lender, or to a new loan with your current lender, usually to get a lower rate or better features. It can save you real money, but it isn’t free and it isn’t always the answer. This guide gives you five questions and a simple formula to work out whether switching is worth it for you.
Step 1: Work out what the rate gap is worth
Start with the number that matters most: how much you’d save each month. A 0.50% lower rate on a $600,000 loan, over a 30-year term, looks like this:
| Current loan | New loan | |
|---|---|---|
| Interest rate | 6.49% | 5.99% |
| Monthly repayment | about $3,788 | about $3,593 |
| Saving | about $195 a month, or $2,340 a year |
That’s illustrative, but it shows why a small rate gap adds up on a big loan. Even 0.25% on the same loan is about $98 a month. Our refinancing calculator lets you test your own balance, rate and term.
Step 2: Add up what it costs to switch
Savings only count after costs. Common costs to check include:
- Discharge fee from your current lender for closing the loan.
- Application, settlement or valuation fees from the new lender. Some lenders waive these.
- Break costs on a fixed rate. If you leave a fixed loan early, you can face a charge that depends on how rates have moved since you fixed. Ask your lender for a figure before you decide.
- Lenders mortgage insurance (LMI) if your new loan is above 80% of your property’s value.
- Cashback conditions. A cashback can offset the costs, but read the terms, because it’s often clawed back if you leave within a set period.
Then use this formula:
Switching costs ÷ monthly saving = months to break even
If switching costs about $1,200 and you save $195 a month, you break even in around six months. After that, the saving is yours. If you plan to sell or refinance again soon, a longer break-even may not be worth it.
Step 3: Check your equity
Most lenders offer their best rates to borrowers with at least 20% equity, which means a loan of 80% or less of the property’s value. Equity matters more right now because values are falling. Cotality’s index shows national home values fell 1.2% in October, the seventh monthly fall in a row.
Here’s what that can do. A $600,000 loan on a $720,000 home is an 83% loan-to-value ratio (LVR). If the lender values the home 5% lower, at $684,000, the LVR rises to about 88%, which can mean a higher rate or LMI. Our look at what falling values mean for your loan explains more.
Step 4: Think about the remaining term
If you’ve paid your loan down for five years, refinancing into a new 30-year term can lower your repayment but stretch out your debt and your total interest. A simple way around this is to keep your repayment where it is.
In the example above, if you refinance to 5.99% but keep paying $3,788 a month, you’d pay off the $600,000 in about 26 years instead of 30, and pay around $174,000 less interest than staying on 6.49% for the full term. You get the lower rate, and you keep your pace. Our guide to extra home loan repayments shows how that works.
Step 5: Decide what you want from the loan
A lower rate isn’t the only reason to refinance. Think about whether you want:
- An offset account to reduce interest while keeping cash accessible.
- A split loan, with part fixed for certainty and part variable for flexibility.
- To consolidate debts into one loan, though stretching short-term debt over 30 years can cost more overall.
- To release equity for renovations or an investment.
Check fees and features on both sides, and compare using the comparison rate, which includes most fees and charges.
Before you switch: ask your current lender
Sometimes you don’t need to move. Call your lender, tell them you’re comparing, and ask for a rate review. Lenders often offer better rates to new customers than existing ones, so it’s worth asking whether they’ll match what you’ve found. A broker can show you what’s on offer across the market so you know what to ask for.
When refinancing might not be worth it
- You’re on a fixed rate with high break costs. It can be cheaper to wait until the term ends.
- Your equity is thin, or the property value has dropped, so you’d pay LMI or a higher rate.
- Your circumstances have changed. A new lender reassesses your income and spending, and tests your repayments at 3 percentage points above the rate (APRA). Cotality estimates borrowing power is down about 11.5% since the rises began, so some borrowers who qualified before may not now.
- The saving is small and your break-even is longer than you’ll hold the loan.
How long does refinancing take?
Usually a few weeks from application to settlement, depending on the lender and how quickly your documents are ready. If you want a lower rate soon after the 13 November rises land, it’s worth starting now. We cover when lenders are passing the rise on in our latest rate rise breakdown.
Common questions about refinancing
How much does it cost to refinance? It varies by lender and loan. Check discharge fees, new loan fees, valuation costs, any fixed rate break costs and LMI, then use the break-even formula above.
Is it worth refinancing for 0.25%? It depends on your loan size and costs. On a $600,000 loan, 0.25% is about $98 a month, which can still pay back quickly if switching costs are low.
Will refinancing affect my credit score? Applying for a loan creates an enquiry on your credit file, so avoid making several applications at once. A broker can narrow down the options first.
Can I refinance to a different lender? Yes. You can move to any lender that approves you, though they’ll assess your income, spending, debts and property value afresh.
Can I refinance if my home value has fallen? Often yes, but a lower value can raise your LVR, which can affect your rate and whether LMI applies.
Talk to us
hfinance compares across 50+ lenders and can show you whether refinancing would save you money after costs. Contact us and we’ll run your numbers.
This article is general information only and does not take into account your personal financial situation or objectives. Rates, fees and policies change, and all figures are illustrative, based on a 30-year principal and interest loan. Speak with an hfinance broker before making any lending decisions.