Refinancing is worth it when the monthly saving pays back the switching costs within a period you are confident you will stay, and when nothing about your circumstances makes the new loan worse. Rate is the usual reason but rarely the only one. Extending your loan term to reduce repayments can cost more in total interest than the rate saving recovers.
Refinancing has become something people feel they ought to do periodically, like servicing a car. It is worth doing when the numbers say so and not otherwise, and the numbers are not difficult. What follows is the actual test, and the situations where the answer is no.
The break-even test
Add up what switching costs you. In most cases that is a discharge fee from your current lender, land registry fees to remove and register the mortgage, and any application or valuation fee at the new lender. If you are above 80% LVR, add LMI, which frequently ends the discussion on its own.
Then work out the monthly saving. Divide the costs by the saving and you have the break-even in months.
| Switching costs | $1,200 |
|---|---|
| Monthly saving | $150 |
| Break-even | 8 months |
Eight months is comfortably worth it if you intend to keep the property for years. If the break-even runs past two years, or past the point you expect to sell, the case is weak. The refinance break-even calculator does this with your figures, and the refinance savings calculator shows the saving over the full term.
The trap inside the saving
Here is where a great many refinances quietly cost people money.
When you refinance, the new loan usually starts at a fresh 30 year term. If you were eight years into your old loan, you have just returned to the beginning. Your repayment falls — partly because of the better rate, but substantially because you have spread the remaining balance over 30 years instead of 22.
That looks like a saving every month and can be a large loss overall, because you pay interest for eight additional years.
Ask the new lender to match your remaining term rather than resetting to 30 years. Your repayment will not drop as dramatically, but the rate saving becomes a genuine saving instead of a longer mortgage wearing a disguise. If you do take a fresh 30 year term, keep repaying at the old amount and the problem disappears.
Reasons to refinance that are not about rate
Rate is the headline, but several other reasons are more valuable when they apply.
- Accessing equity. Releasing equity to renovate, or as a deposit for an investment property. See accessing equity and the usable equity calculator.
- Getting features you lack. A proper offset account, or the ability to make unlimited extra repayments, can be worth more than a small rate difference.
- Consolidating expensive debt. Genuinely useful when handled carefully, and genuinely damaging when not — see consolidating debt into your mortgage.
- Restructuring after a change. Separation, a death, moving from owner-occupied to investment, or a change in who is on the title.
- Escaping a revert rate after a fixed term ends, which is one of the most reliably worthwhile reasons of all.
- Crossing below 80% LVR. If your property has risen or your balance has fallen, you may qualify for pricing that was unavailable when you first borrowed.
When you should not refinance
- You would pay LMI again. Still above 80%? A fresh premium usually swamps any rate saving. Wait until you are under.
- You are in a fixed term. Break costs can be substantial. Get the figure in writing before doing anything.
- Your income or credit position has weakened. Refinancing means a fresh assessment. If your circumstances have deteriorated since you first borrowed, you may not qualify — and a declined application does you no favours. If money is tight, talk to your existing lender about hardship arrangements instead.
- You are about to sell. You will not reach break-even.
- The only gain is a lower repayment from a longer term. That is not a saving.
What the process involves
A refinance is a full loan application: identification, income evidence, your existing loan statements, and a valuation of the property. Expect two to four weeks in a straightforward case.
Two practical points. First, keep paying your existing loan until settlement is confirmed — a missed payment during the process is an unhelpful mark on your file. Second, avoid new credit while it is underway; a car loan or a new card mid-application can change the assessment.
The refinancing page sets out the steps in more detail.
How often is too often
There is no rule against refinancing regularly, but there are diminishing returns. Each switch costs fees and time, each application leaves a credit enquiry, and a pattern of frequent applications reads poorly to an assessor.
A reasonable habit is to review your rate annually — which does not mean switching annually. Most of the time the right action is a phone call to your existing lender asking them to reprice. That costs nothing, carries no credit enquiry, and works more often than people expect.
Common questions
Typically a discharge fee, land registry fees and sometimes an application or valuation fee at the new lender. Many lenders waive their own fees to win business. The figure that changes the answer is LMI, which applies again if you are still above 80% LVR.
Each application creates an enquiry on your file with a small, temporary effect. One refinance is unremarkable. Several applications to several lenders in a short period is the pattern that concerns assessors, so it is worth identifying the right lender before applying.
It depends on the resulting LVR. If the fall has pushed you above 80%, you may face LMI or find that lenders will not take the loan at all. A valuation early in the process tells you where you stand before you commit.
Only if the lower repayment comes from a better rate rather than a longer term. Spreading the same debt over more years reduces the monthly figure and increases the total cost. Ask for your remaining term to be matched.
You can, but break costs may apply and they can be large when rates have fallen since you fixed. Always get the exact break cost from your lender in writing before making a decision.