Is It Time to Refinance? How to Save Thousands on Your Home Loan
Refinancing your home loan could save you a significant amount of money — or it could cost you more than you think. Here is how to know if the time is right and what to look for.
The Loyalty Tax: Why Your Bank Is Probably Overcharging You
Here is something that frustrates us every day in this industry. Australian banks are notorious for offering their best interest rates to new customers — while their loyal, existing customers quietly pay more. The difference between what a new borrower pays and what a long-standing customer pays with the same bank can be 0.5% to 1% or even more.
On a $600,000 loan, 1% per annum in additional interest adds up to $6,000 per year — or roughly $180,000 over a 30-year loan term. That is not a small amount of money. It is money that could fund school fees, build an emergency buffer, contribute to an investment property deposit, or simply sit in an offset account reducing your debt faster.
Refinancing — moving your home loan to a different lender at a better rate — is one of the most powerful financial moves available to Australian homeowners. And yet millions of Australians are sitting on loans that have not been reviewed in years, continuing to pay more than they need to.
What Is Refinancing?
Refinancing means replacing your existing home loan with a new one — either with your current lender (called a loan variation or internal refinance) or, more commonly, with a different lender entirely.
When you refinance externally, the new lender pays out your existing loan and you begin repayments on the new loan, ideally at a lower interest rate, with better features, or both. The process involves a new loan application, a property valuation by the new lender, and a discharge of your old mortgage.
It sounds more complicated than it is. With a good broker managing the process, most straightforward refinances are completed within four to six weeks, with minimal disruption to your daily life.
Signs It Is Time to Refinance
The most obvious trigger is noticing that your interest rate is no longer competitive. Interest rates across the market change constantly, and a loan that was excellent three years ago may now be mediocre compared to what is available. If you have not had your loan reviewed in the past two years, there is a good chance you could do better.
Some specific signs that refinancing is worth exploring include: your current interest rate is more than 0.5% above what competitive lenders are offering for a similar loan; your loan has a basic rate structure but you are now earning enough to benefit significantly from an offset account; your financial situation has improved significantly since you took out the loan, and you now qualify for better terms; your fixed rate period is ending and you are about to roll onto a variable rate that may not be the most competitive available; or you have built up significant equity in your property and want to access it for renovation, investment, or other purposes.
How Much Could You Actually Save?
Let us run a simple example. You have a $700,000 variable rate loan and your current lender is charging you 6.50% interest. A competitive lender is offering 5.85%.
On a $700,000 loan, the difference in monthly repayments between 6.50% and 5.85% (principal and interest, 25-year term) is approximately $300 per month. That is $3,600 per year and $90,000 over the remaining loan term. Even after accounting for the costs of refinancing — which are typically between $1,000 and $3,000 for a straightforward refinance — the savings are compelling.
The actual savings in your case will depend on your loan balance, the rate difference, and the remaining loan term. A broker can model this for you precisely using current rates, including accounting for all the costs involved, so you can make an informed decision.
Cash-Out Refinancing: Accessing Your Equity
Refinancing is not just about getting a lower rate. Many homeowners refinance specifically to access equity they have built up in their property.
Equity is the difference between your property’s current market value and the amount you owe on your loan. For example, if your home is worth $1.2 million and your loan balance is $700,000, your equity is $500,000. Most lenders will allow you to access up to 80% of your property’s value (less what you owe), which in this example would be $260,000 of accessible equity.
This equity can be used for a wide range of purposes: renovating your home, funding a deposit on an investment property, purchasing a vehicle, consolidating higher-interest debts, or covering education or business expenses.
Cash-out refinancing is a powerful tool, but it increases your loan balance and therefore your repayments. It should be approached thoughtfully, with a clear plan for how the accessed funds will be used and a realistic assessment of the impact on your overall financial position.
The Break Cost Trap: When Refinancing Can Cost You
If you are on a fixed rate loan, refinancing before the end of the fixed rate period can trigger a break cost (also called an early repayment charge). This is a fee charged by the lender to compensate for the loss of expected interest income when you exit the fixed rate early.
Break costs can be very significant — sometimes tens of thousands of dollars — particularly when interest rates have fallen since you fixed. Before refinancing out of a fixed rate loan, your broker must calculate your potential break cost and factor it into the overall analysis of whether refinancing makes financial sense.
This is one of the situations where doing the maths properly really matters. Sometimes the break cost is small enough that the ongoing rate savings still make refinancing worthwhile. In other cases, it is better to wait until the fixed period expires. Your broker can run this calculation for you.
What to Watch Out For
Not all refinances are created equal. A lower interest rate is not always the whole story. When evaluating a new loan, also consider the comparison rate (which includes fees), any ongoing annual or monthly fees, the loan features (offset account, redraw, extra repayment flexibility), any introductory or honeymoon rates that revert to higher rates after twelve months, and the cashback offers that some lenders advertise — these can be enticing but should not be the primary reason to choose a lender.
Also watch out for extending your loan term unnecessarily. If you have a 20-year loan remaining and you refinance into a new 30-year loan, your monthly repayments drop — but you are adding ten years of interest to your total cost. Always compare refinancing options on a like-for-like term basis where possible.
How the Refinancing Process Works
When you decide to refinance, your broker will assess your current loan, your current property value, and your financial position. They will then identify the most suitable lenders and loan products and compare them in detail.
Once you choose a new loan, your broker submits the application. The new lender will arrange a valuation of your property and assess your income and expenses. If approved, they will arrange settlement — paying out your existing lender and transferring the mortgage.
Your broker handles most of the paperwork and communication throughout the process. For most borrowers, the main tasks are signing documents and providing updated financial information. The process is typically straightforward and, in most cases, completely free — the new lender covers costs, and in some cases offers cashback as an added incentive.
When to Review Your Loan
Our recommendation is to review your home loan at least every two years — and whenever there is a significant change in your financial situation, the property market, or the interest rate environment. The mortgage market is competitive and constantly changing, and what was the best deal two years ago may no longer be.
A review is free, takes less than thirty minutes, and could save you thousands. At The Lending Circle, we offer home loan reviews for existing clients and new clients alike. We will give you an honest assessment of your current position and tell you clearly whether there is a better option available — even if that means staying where you are.