The refinancing mistake borrowers can miss
One of the biggest things to watch is the loan term.
Imagine you have 22 years remaining on your mortgage. You refinance to a lower interest rate, but the new loan is established over 30 years. Your required monthly repayment could fall substantially.
That sounds good — but you're potentially adding another eight years to the period over which the debt can remain outstanding.
Australian Government Moneysmart guidance cautions borrowers about switching into a longer loan term, because the longer a loan runs, the more interest you may ultimately pay.
That's why a refinance comparison shouldn't stop at “what's my new monthly repayment?” It should also ask “what happens to my overall position?”
Five things to compare before refinancing
1. Your existing interest rate versus the proposed rate
A lower rate can reduce interest costs, but the size of the difference matters. The interest rate should be considered alongside the loan term, fees, features and structure rather than in isolation.
2. Your remaining loan term
If you have 20 years remaining on your mortgage, compare the proposed loan over a similar timeframe before automatically resetting the debt to 30 years.
Extending the loan term can reduce the required monthly repayment while potentially increasing the length of time you pay interest.
3. The cost of switching
Depending on the loans involved, refinancing costs can include discharge, application, valuation, legal, settlement or other fees. Fixed-rate loans may also involve break costs.
Moneysmart recommends comparing switching costs against the potential savings and considering how long it will take to recover those costs.
4. The features you'll actually use
Features such as an offset account, redraw facility and repayment flexibility can be valuable when they suit the way you manage your money. But a feature isn't automatically valuable simply because a loan offers it.
Consider which features you will genuinely use and whether you're paying additional fees or a higher rate to access them.
5. What you're trying to achieve
The appropriate lending structure depends on the objective. You may be looking to:
- reduce interest costs
- improve cash flow
- restructure existing debt
- access equity for an appropriate purpose
- prepare for an investment purchase
- obtain loan features better suited to your circumstances
- check whether your existing lender remains competitive
When refinancing may be worth investigating
It may be worth reviewing your mortgage when:
- your existing interest rate is no longer competitive
- your circumstances have changed
- your existing loan structure no longer suits you
- you require different loan features
- you want to understand whether another lender may offer a more suitable option
- you're considering using available equity
- your fixed-rate period is approaching its end
- you haven't reviewed your home loan for some time
When refinancing may not make sense
A lower advertised interest rate doesn't automatically justify moving lenders. It can also be worth speaking with your existing lender first — Moneysmart suggests asking your current lender for a better deal before switching, as they may offer a lower rate to retain your business.
Refinancing may be less attractive when:
- switching costs consume much of the expected benefit
- a fixed-rate loan creates substantial break costs
- changing lenders could result in Lenders Mortgage Insurance or other significant costs
- extending the loan term materially increases the long-term cost
- the new loan includes features or fees that don't suit your needs
- your current lender can provide a suitable alternative without requiring you to move
Can everyone refinance?
No. Refinancing involves applying for credit again, and the lender will assess the application under its current lending criteria. Depending on the application, this can include assessment of:
- income
- living expenses
- existing debts and credit limits
- dependants
- employment or business income
- property value
- available equity
- repayment history
- credit history
- the proposed loan structure
Don't compare the interest rate alone
Your financial position may have changed since your existing mortgage was approved, and lender policies can also change. Being able to make the repayments on your current mortgage therefore doesn't automatically mean a refinance application will meet another lender's current credit criteria.
The better question isn't simply “which lender has the lowest rate?” A more useful question is “which option puts me in the better overall lending position?”
Sometimes that may mean refinancing. Sometimes it may mean renegotiating with your existing lender. Sometimes changing the structure of your existing lending may be appropriate. And sometimes the numbers may show that doing nothing is currently the better option.
A useful independent refinancing tool
ASIC's Moneysmart provides a mortgage switching calculator that can help borrowers estimate whether switching home loans may save money and how long it could take to recover switching costs.
If you'd like your own numbers reviewed rather than estimated, our Mortgage Health Check walks through your current position in a few minutes.
Frequently asked questions
Is refinancing always worth it when I can get a lower interest rate?
No. A lower rate is important, but it should be considered alongside switching costs, remaining loan term, proposed new loan term, fees, features and the overall lending structure.
Does refinancing restart my home loan?
A new lender may establish a new loan term as part of the refinance. This does not mean you must automatically choose the maximum available term. Comparing the proposed loan using a term similar to the remaining term on your existing mortgage can help provide a more meaningful comparison.
Can I ask my existing bank for a lower rate instead?
Yes. It may be worth asking your existing lender whether they can offer more competitive pricing before deciding to refinance.
Can I refinance to access equity?
Potentially. Available equity, borrowing capacity, property valuation, loan purpose and lender credit criteria can all affect whether additional borrowing is available.
Will refinancing affect my borrowing capacity?
A refinance is assessed as a new credit application. The lender will assess your financial position and the proposed lending under its current credit criteria.
How often should I review my home loan?
There is no single review frequency appropriate for everyone. However, reviewing your loan periodically or when your circumstances, interest rate, fixed-rate period or financial objectives change can help determine whether the existing loan still suits your position.
General information only. This information does not take into account your objectives, financial situation or needs. Lending criteria, fees, rates and eligibility vary between lenders and may change. Credit is subject to lender approval and applicable lending criteria.