Refinancing your home loan means replacing your existing mortgage with a new one, typically with a different lender or on different terms. Done at the right time and for the right reasons, refinancing can save you tens of thousands of dollars over the life of your loan. Done poorly, it can cost you money. This guide helps you figure out which situation applies to you.
Common Reasons to Refinance
1. Securing a Lower Interest Rate
This is the most common reason borrowers refinance. Even a small rate reduction can make a meaningful difference. On a $500,000 loan with 25 years remaining, reducing your rate by 0.50% could save you approximately $150 per month or over $45,000 in total interest (the exact figure depends on your specific loan terms and repayment type).
Lenders often reserve their most competitive rates for new customers, which means loyal borrowers may be paying more than necessary. This is sometimes called the "loyalty tax." If you have not reviewed your rate in the past 12 to 18 months, it is worth checking where you stand compared to the current market.
2. Accessing Equity
If your property has increased in value since you purchased it, you may have built up equity that you can access through refinancing. This equity can be used for renovations, purchasing an investment property, or other purposes. Your broker can help you understand how much usable equity you have and structure the loan appropriately.
3. Changing Loan Features
Your needs may have evolved since you first took out your loan. Perhaps you want an offset account, the ability to make extra repayments without penalty, a redraw facility, or the flexibility to split your loan between fixed and variable portions. Refinancing lets you switch to a product that better fits your current circumstances.
4. Consolidating Debts
Some borrowers refinance to consolidate higher-interest debts (such as credit cards or personal loans) into their mortgage. While this can reduce your overall monthly payments, be aware that you are spreading these debts over a longer term, which may result in paying more interest overall. Discuss the trade-offs with your broker before proceeding.
5. Fixed Rate Expiry
When a fixed rate term expires, your loan typically reverts to the lender's standard variable rate, which is often higher than what you could obtain by refinancing to a new product. This is one of the most common triggers for refinancing and a good time to review all your options.
Calculating Your Break-Even Point
Refinancing is not free, so you need to ensure the savings outweigh the costs. The break-even point is the number of months it takes for your monthly savings to recoup the upfront costs of refinancing.
Example: If refinancing costs you $1,500 in total (discharge fees, registration, and application fees) and saves you $200 per month in repayments, your break-even point is 7.5 months. After that, every month's savings is money in your pocket.
If the break-even point is more than two to three years away, refinancing may not be worthwhile unless you plan to hold the loan for significantly longer. Your broker can calculate this precisely based on your current loan details and the proposed new loan terms.
Quick Break-Even Formula
Break-even (months) = Total refinancing costs / Monthly savings
If the result is under 12 months, refinancing is generally a strong financial decision. Between 12 and 24 months is still favourable for most borrowers.
When Refinancing May Not Make Sense
- You are on a fixed rate with high break costs. Exiting a fixed rate early can incur substantial break costs (sometimes tens of thousands of dollars). Always get a break cost estimate from your current lender before proceeding.
- Your loan balance is small. On smaller loan balances, the dollar savings from a lower rate may not justify the costs and effort of refinancing.
- You are planning to sell soon. If you intend to sell your property within the next year or two, the refinancing costs may not be recovered in time.
- Your credit profile has deteriorated. If your financial circumstances have changed for the worse since you took out your original loan, you may not qualify for a better rate elsewhere.
The Refinancing Process
Refinancing follows a similar process to taking out a new home loan. Your broker will review your current loan, compare it against available products, and recommend options. If you decide to proceed, the broker manages the application, coordinates with both lenders, and handles the settlement.
At Manage Your Loans, we make refinancing as straightforward as possible. All loan documents are signed securely via SignAndGo, meaning you can complete the process from home. We also continue monitoring your rate after settlement to ensure it remains competitive.
The typical timeline from initial enquiry to settlement is two to four weeks for a straightforward refinance. More complex scenarios, such as those involving self-employed borrowers or multiple properties, may take slightly longer.
How Often Should You Review Your Loan?
We recommend reviewing your home loan at least once a year, or whenever there is a significant change in your circumstances (such as a salary increase, change in family situation, or property value growth). Regular reviews ensure you are not paying more than you need to.
If you are unsure whether refinancing is right for you, explore our refinancing services or book a free review with one of our brokers. There is no obligation, and the consultation will give you a clear picture of your options.