Refinancing Mistakes to Avoid When You Switch Home Loans

The most common refinancing mistakes are switching for a lower rate without counting the costs, extending the loan term and quietly paying more interest, forgetting that lenders mortgage insurance can apply again, and not negotiating with your current lender first. Refinancing, also called switching home loans, can leave you better off, but only if the saving survives the costs of moving. Whether it does depends on your circumstances and lender criteria, so the smart approach is to check the numbers before you commit, not after.

This guide walks through the mistakes when refinancing that catch people out most often, with the figures that matter and where they come from. The aim is simple: help you avoid the refinance pitfalls that can turn a good idea into an expensive one. If you want the full picture on how switching works, start with our guide to Refinance.

Mistake 1: chasing a lower rate without counting the costs

The headline saving from a lower interest rate is easy to see. The costs of getting there are easy to miss. According to ASIC’s MoneySmart guide to switching home loans, there can be an interest rate difference of more than 2% in variable home loan rates across the market, so an older loan may no longer be competitive. That gap is real, but it is only half the picture.

Switching has costs, and MoneySmart names them clearly: a break fee on fixed rate loans, a discharge or termination fee to close your current loan, an application fee on the new loan, a switching fee if you refinance internally with the same lender, stamp duty in some cases, and lenders mortgage insurance where your equity is low. The amounts vary by lender, so the only honest figure is the one you get in writing.

The mistake is treating the rate cut as the whole story. MoneySmart is direct that the cost of switching can outweigh the savings, so the rate alone does not tell you whether you come out ahead. You may save, or you may not, depending on the size of those costs and how long you keep the loan.

Mistake 2: extending the loan term and paying more interest

This is one of the quietest refinance pitfalls. When you refinance, you often start a fresh loan term, and a longer term spreads your repayments out, which can make them look smaller and more attractive. The trap is what it does to total interest.

MoneySmart puts it plainly: the longer you have a loan, the more you will pay in interest. So a lower rate stretched over more years can still cost you more overall than a slightly higher rate with fewer years to run. If you have 22 years left on your current mortgage, refinancing into a fresh 30 year term resets the clock and can add years of interest.

The fix is to keep the new loan term similar to the time left on your current one, so a lower rate actually works in your favour rather than being cancelled out by extra years.

Mistake 3: forgetting lenders mortgage insurance can apply again

Many people pay lenders mortgage insurance, usually shortened to LMI, when they first buy with a small deposit, then assume it is behind them. Refinancing can bring it back.

MoneySmart notes that if you have less than 20% equity in your home, a new lender may require LMI. If your equity has grown above 20% since you first borrowed, you may avoid it, which is exactly why checking your equity is an early step. If it has not, a fresh LMI premium can wipe out the saving from a lower rate. To understand how lenders mortgage insurance works and how the ratio behind it is measured, see What is lenders mortgage insurance and What is lvr first home buyer.

This works the other way too. MoneySmart points out that if you have at least 20% equity in your home, you have more to bargain with when negotiating. More equity means more options and a stronger position, whether you switch or stay.

Mistake 4: not negotiating with your current lender first

It is easy to assume the only way to a better rate is to leave. Often it is not. MoneySmart suggests negotiating with your current lender first, because they may reduce your rate to keep your business before you go to the effort and cost of switching.

A phone call asking your lender to match a better deal you have seen elsewhere is free, and it avoids every one of the switching costs above. Skipping that step is a mistake when refinancing because you may pay break fees, discharge fees and application fees to get a rate your existing lender would have given you anyway.

Mistake 5: applying with several lenders at once

Spreading applications across lenders to see who bites feels efficient. It can work against you. MoneySmart explains that the number of credit applications you have made is one of the factors used to calculate your credit score, and requests for your credit report by credit providers are recorded on your report.

Your credit report is a record of your credit history, including your credit rating, the credit products you hold and your repayment history. Your credit score is calculated from that information and typically ranges between zero and either 1,000 or 1,200, with a higher score meaning lower risk to a lender. Several applications in a short window can leave a trail on your report, so it is better to compare loans first and apply once you have chosen, rather than applying everywhere to compare.

Mistake 6: comparing the headline rate instead of the comparison rate

The advertised interest rate is not the full cost of a loan. The comparison rate is designed to bundle in most fees alongside the rate, so it gives a fairer like for like figure. Comparing only the headline rate is a classic refinance pitfall, because a loan with a low advertised rate and high fees can cost more than a loan with a slightly higher rate and low fees.

If you want to understand how that figure is built and why it matters, read more on the comparison rate before you compare offers: Comparison rate explained.

Mistake 7: relying on a calculator as if it were a quote

A switching calculator is a useful first check, not a final answer. MoneySmart recommends using the mortgage switching calculator to work out whether changing home loans could save you money, and you can try the refinance calculator to estimate repayments at a new rate. Just know its limits.

The MoneySmart mortgage calculator is described as a model, not a prediction. Amounts and repayment periods are estimates only, and it does not take into account up-front costs such as loan establishment fees. So a calculator can show the rough shape of a saving, but it will not include the break fees, discharge fees or LMI that decide whether refinancing is worth it for you. Treat the output as a starting point and add the real costs before you decide.

A quick checklist to avoid these refinancing mistakes

Before you sign anything, work through the basics:

If something goes wrong with a lender or broker and you cannot sort it out directly, you can raise a complaint with the Australian Financial Complaints Authority, known as AFCA, which provides a free external dispute resolution service.

Frequently asked questions

Talk to the team at Finance Lab

If you are weighing up a refinance, the team at Finance Lab can review your current loan, compare options across lenders and work out whether switching is likely to leave you better off once the costs are counted. Get in touch to talk through your situation.