Refinancing: When It Pays to Switch, and When It Doesn’t

The short answer

Refinancing means moving your loan to a new lender, or a new loan with your current one. Done well, it can save you thousands. Done for the wrong reasons, the costs and hassle can outweigh the savings.

The key is looking at the full picture, not just the headline rate.

Why people refinance

• A better rate: the most common reason.
• Better features: such as an offset account or more flexible repayments.
• Equity release: to fund renovations, an investment or another goal.
• Debt consolidation: rolling higher-interest debts into your home loan.
• Restructuring: setting up splits, changing IO or P&I, or moving away from crossed loans.

The loyalty tax, and why we try repricing first

Lenders often save their sharpest rates for new customers. If you’ve had your loan for a few years and never reviewed it, there’s a good chance you’re paying more than you need to. This is often called the loyalty tax.

Before you switch, we’ll often go back to your current lender and negotiate a sharper rate. If they come to the party, you save without the costs or hassle of moving.

The costs of switching

• Discharge fee: charged by your current lender to close the loan.
• Government registration fees: to discharge the old mortgage and register the new one.
• New lender fees: many lenders charge none for refinances, but some do.
• Break costs: if you’re leaving a fixed rate early.
• LMI: if you’re borrowing more than 80% of your property’s value. LMI doesn’t transfer between lenders, so you may have to pay it again.

Don’t just chase the rate

It can be tempting to jump from lender to lender for a slightly better rate. But every move comes with fees and charges, and there’s more to a loan than its rate:

• The cost of convenience: time spent on applications, setting up new accounts, and moving direct debits.
• Banking requirements: some lenders need your salary or everyday banking with them to get the advertised rate.
• Features you’d lose: such as an offset account you rely on.
• Cashback offers: tempting, but a cashback paired with a higher rate can cost you more over time.

We compare your options all things considered, and tally the cost over one year, two years and beyond, so you get an accurate picture of where you’ll actually be in terms of savings.

Worked example: the savings over time

Zoe has a $600,000 loan at 6.20%. She has three options, with about $650 in switching costs for each refinance. Here are her cumulative savings compared with doing nothing:

Option	Year 1	Year 2	Year 5
Reprice with her current lender to 5.90%	about $1,800	about $3,600	about $9,000
Refinance to 5.70%, with a $395 annual package fee	about $1,955	about $4,560	about $12,375
Refinance to 6.10% with a $3,000 cashback	about $2,950	about $3,550	about $5,350

The cashback looks best in year one, but it’s the worst option by year five. And a simple reprice gets Zoe most of the way without moving at all.

Simplified illustration based on interest on the full loan amount. Actual savings depend on your loan, repayments and fees.

You’re reassessed, and how the process works

A new lender will assess you from scratch, including your income, expenses and debts. If your circumstances have changed, it’s worth checking you still qualify before you start. Some lenders use a lower 1% serviceability buffer for straight, dollar-for-dollar refinances.

Once approved, we handle the paperwork with both lenders. Your new lender pays out the old loan at settlement, typically a few weeks after you apply, and your repayments move across.

Thinking about refinancing?

With access to over 40 lenders, our team of lending specialists will try repricing first, then compare every option all things considered, so you can see your real savings over one year, two years and beyond.

Book a chat · Next lesson: Construction loans

All Knowledge Hub lessons

General information only. This article does not consider your objectives, financial situation or needs and is not credit, financial or tax advice. Examples are simplified and rates are hypothetical. Seek advice from a licensed credit adviser before acting. Insight Property Finance.