Refinance
Should I Refinance My Home Loan? How to Decide
Should I refinance my home loan? Learn the break-even test, the switching costs, and when refinancing may pay off. Outcomes depend on your circumstances.
Should I refinance my home loan? The honest answer is that it depends on your circumstances and lender criteria, but you can usually settle it with one test: do the savings from a lower rate beat the cost of switching, and how long does it take to get ahead? Refinancing means moving your home loan to a new loan, either with your current lender or a different one, usually to chase a lower rate or features that suit you better. This guide walks through the numbers and the warning signs so you can decide whether refinancing makes sense for you right now.
This is general information only. The work here draws on the Australian Securities and Investments Commission’s MoneySmart service, the government’s independent money guidance.
Why people refinance in the first place
There are a handful of common reasons to refinance a mortgage, and it helps to be clear on yours before you start. People usually switch to get a lower interest rate, to move from a variable rate to a fixed rate or the other way around, to unlock a feature their current loan does not offer, or to consolidate other debt into the home loan. Our refinance home loans hub sets out how the process works from start to finish.
The size of the prize can be real. According to MoneySmart’s guide to switching home loans, there can be an interest rate difference of more than 2% in variable home loan rates on the market, so the loan you signed up for years ago may now sit well above what is available today.
Should I refinance my home loan now? Start with your current lender
Before you go anywhere, tell your current lender you are planning to switch to a cheaper loan offered by a different lender. MoneySmart suggests doing exactly this, because lenders sometimes match or beat a competitor rate to keep your business, and a phone call costs nothing. If they will not move, that is your signal to compare what else is out there. So if you are asking should I refinance my home loan now, the first step is often not to refinance at all, but to renegotiate.
Run the break-even test
The simplest way to decide is the break-even calculation. You add up the one-off costs of switching, then divide that by the amount you would save each month. The result is the number of months it takes for the savings to cover the costs. If you plan to keep the loan well past that point, refinancing may be worth it. If you might sell or move again soon, it may not be.
Your monthly saving is driven by three things: the size of your loan balance, the gap between your current rate and the new rate, and the loan term you choose. When you compare loans, look at the comparison rate rather than the headline rate. A comparison rate is a single figure of the cost of the loan that includes the interest rate and most fees, which makes it easier to compare loans on a like for like basis. You can read more in our comparison rate explained guide.
The costs that can erode the benefit
Switching is rarely free. The MoneySmart switching guide names several costs that can apply when you refinance.
| Cost | When it applies |
|---|---|
| Break fee | If you leave a fixed rate loan early |
| Discharge or termination fee | To close your current loan |
| Application fee | On the new loan you apply for |
| Switching fee | If you refinance internally with the same lender |
| Stamp duty | In some cases when you refinance |
| Lenders mortgage insurance | If you have less than 20% equity |
If you are on a fixed rate, leaving the loan early can trigger a break fee, which can be substantial and is set by the lender based on conditions at the time. Break costs are a common reason a refinance that looks good on paper may not stack up, so always ask your lender for a figure in writing before you commit.
Lenders mortgage insurance and your equity
If you have less than 20% equity in your home when you refinance, you might have to pay lenders mortgage insurance again, even if you paid it on your original loan. If you have at least 20% equity, you have more to bargain with. That single threshold can be the difference between a switch that pays off and one that does not, so it is worth checking your loan-to-value ratio first.
Our guides on how to avoid LMI and what is LVR explain how lenders work this out.
Do not let the loan term reset quietly
A lower rate does not automatically mean you pay less interest overall. MoneySmart cautions that you should be firm on the length of home loan you want, otherwise you could end up with a longer loan term. If you stretch the loan back out to a fresh 25 or 30 year term, you can increase the total interest you pay over the life of the loan, even at a lower rate, because you are paying it off over more years. To keep the full benefit, you can ask the new lender to match your remaining term, or keep your repayments at the old level so the extra goes straight onto the principal.
Is it a good time to refinance? Fixed, variable and features
Part of the decision is not just the rate but the type of loan and the features.
| Rate type | What it gives you | The trade-off |
|---|---|---|
| Fixed rate | Predictable budgeting, repayments stay the same for a set period | You will not benefit if rates fall and may face break fees if you switch during the fixed term |
| Variable rate | More flexibility and easier to switch | Your repayments can rise when the market moves |
Whether it is a good time to refinance depends on which of these suits your plans and your tolerance for change, not on the market alone. Features matter too. An offset account can reduce the interest you pay by holding your savings against your loan balance, and a redraw facility lets you withdraw extra repayments you have made. Weigh any feature against its cost based on how you would actually use it.
When refinancing may be worth it
Refinancing tends to make sense when several of these are true:
- Your current rate sits well above the market and the gap is more than a small fraction of a percent.
- You have enough equity, ideally 20% or more, to avoid paying lenders mortgage insurance again.
- You plan to keep the loan past the break-even point.
- You are not locked into a fixed rate with a break fee that wipes out the savings.
- You want a feature your current loan does not offer, such as an offset account or the ability to make extra repayments.
It is worth reviewing your loan every year or two even when nothing has changed for you, because a rate that looked competitive then may not be today.
Work out the numbers before you commit
You do not have to do this by hand. MoneySmart suggests using a mortgage switching calculator to work out if you will save money by changing home loans. The ASIC MoneySmart mortgage calculator helps you work out your repayments and explore the effect of a higher or lower interest rate, though using it does not guarantee you will be eligible for a loan. Start by checking whether your current rate is still competitive, then test the gap against the switching costs.
Try the refinance calculator
Open the calculator to run your own numbers.
Talk it through with the team at Finance Lab
Whether you should refinance your home loan always comes down to your own numbers, your equity, and your plans for the property. If you would like a hand running the break-even maths and comparing what is available against your current loan, the team at Finance Lab can walk you through it. Outcomes depend on your circumstances and lender criteria.
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