Switching home loans can be a smart move under the right circumstances. But there are also times you’re better off staying put. Refinancing done well can lower your repayments, unlock better features, or free up equity for your next goal. Done at the wrong time, it can cost you more than it saves. Here’s how to tell the difference.
Reasons you might want to refinance
The mortgage market is competitive and loan products change regularly, so what was a good deal when you took out your loan might not be one today. Here are five common reasons people choose to refinance.
- Save money. The most common reason to refinance is switching to a lower interest rate. This can lower your monthly repayments and reduce the total interest you pay over the life of your loan. Refinancing does come with its own costs, though, such as application and valuation fees, and your current lender may charge you for exiting your mortgage, so factor these into your calculations.
- Get better features. Interest rate shouldn’t be your only consideration. You might want a redraw facility, which lets you make extra repayments and withdraw them later if your circumstances change, or an offset account, which can help you pay less interest and become mortgage-free sooner.
- Pull out equity. If you’ve been paying off your mortgage for a while, you’ve likely built up equity. This is the difference between what you owe and the property’s current value. Refinancing may let you access some of this, for example as a deposit on an investment property.
- Change your loan term. If you can afford higher monthly repayments, refinancing to a shorter loan term means you pay off your mortgage faster and save on interest in the long run.
- Change your loan type. Refinancing gives you the option to switch between principal and interest or interest-only, or between fixed and variable rates. This is useful if your priorities or the rate environment have shifted since you took out your original loan.
When it could be a good idea to refinance
Most people refinance to save money, so switching could make sense if the total cost of a new loan would be less than the total cost of your existing one. Remember that “total cost” isn’t just the interest rate. You should also weigh up:
- Discharge fees
- Loan establishment/application fees
- Mortgage registration fees
- Ongoing loan service fees
- The revert rate, which is the rate your new loan reverts to once any introductory period ends
If you’d still come out ahead after accounting for all of this, it could be a good time to make the switch.
When you might not want to refinance
It’s worth reviewing your mortgage from time to time, but there are situations where refinancing might not make sense:
- You can negotiate with your current lender. Call them and let them know you’re considering moving. They may be willing to match a rival’s rate or features, or come close.
- You have a small loan. Switching might cost you money, or deliver too small a return to justify the time and effort.
- You have a high loan-to-value ratio (LVR). If falling property prices have pushed your LVR above 80%, you might be forced to pay lender’s mortgage insurance (LMI) when refinancing, which could cancel out any savings.
- There are hidden costs. If your new loan has higher fees or reverts to a higher rate after an intro period, it could end up costing more over the long run than staying put.
While you might not be able to tick every box, refinancing can be the right decision if you find a loan that strikes a good balance between affordability, flexibility and suitability for your current circumstances.
Have a more specific question about refinancing?
These cover some of the situations we’re asked about most often:
- Could refinancing impact your credit score?
- How soon after getting a mortgage can you refinance?
- What does it cost to refinance a mortgage?
- Can I refinance with a default or judgement?
As with any financial decision, it’s a good idea to get professional advice before you decide to refinance. It can be a smart move under the right circumstances, but it isn’t right for everyone. If you’re weighing up your options, book an appointment with our team and we’ll help you work through whether it makes sense for you.