Refinancing saves money only when the lower rate outweighs the costs of switching. For many homeowners, a clear comparison of the numbers is the first step.
If you bought or last reviewed your loan some time ago, your lender may not have changed your rate to match what new customers are offered. A short review can show whether you are paying more interest than you need to.
How Much Can You Save by Refinancing to a Lower Rate?
The saving depends on your loan amount, your remaining term and the gap between your current rate and the new one. A lower rate on a larger balance with a long term left tends to produce the biggest difference.
As an example, consider a Northmead homeowner with $600,000 left on their loan and 25 years to go. They are paying 7.25% p.a. and find a lender offering 6.75% p.a. These rates are illustrative only and are not current offers.
- At 7.25% p.a., the monthly repayment is about $4,337.
- At 6.75% p.a., the monthly repayment is about $4,145.
That is roughly $190 a month, or around $2,300 a year, less in repayments. The homeowner keeps the same 25-year term so the comparison is like for like. They then check what the switch costs. Lenders can charge discharge or application fees, and some offer cashback deals that change the maths. The switch makes sense when the savings, over the period you expect to keep the loan, exceed all the switching costs. To work out your own break-even point, divide your total switching costs by your monthly saving. A tool such as the Moneysmart mortgage switching calculator can help you test your own figures.
The term can also be a trade-off. In this example the new term matches the remaining term, so the loan is not extended. But if the new term is longer than your remaining term, for example refinancing a loan with 20 years left onto a new 30-year term, your repayments fall while the total interest you pay rises. If you have already paid down part of your loan, keeping repayments at your old level after you refinance helps you clear the debt sooner.
When Is the Right Time to Refinance?
The right time to refinance is when the saving is larger than the cost of switching, or when your loan no longer suits your situation. Common triggers include a rate that has drifted above what other lenders are offering, a change in income, or a fixed term that is about to end.
If you are on a fixed rate, check your contract before you move. Leaving early can trigger break costs, and these depend on your lender and on how rates have moved since you locked in. Waiting until the term ends often avoids that charge. Our page on fixed rate expiry help explains your options when the end date is near, including moving to a variable rate or fixing again.
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What Should You Check Before Choosing a New Loan?
Compare the total cost of the loan, not just the headline rate. A lower rate can lose its appeal if it comes with fees, fewer features or a repayment structure that does not suit you.
There are a few points worth weighing:
- Offset account: Money in an offset account reduces the interest charged on your loan. The trade-off is that some loans with offsets carry a higher rate or an annual package fee.
- Redraw facility: Redraw lets you access extra repayments you have made. Check whether the lender limits how much you can withdraw or charges for it.
- Variable or fixed: A variable rate moves with the market and gives you room to make extra repayments. A fixed rate gives certainty, but may limit extra repayments and can cost you if you exit early.
The right mix depends on how you manage your money. Someone who keeps a large cash buffer may benefit from an offset, while someone who prefers a set repayment may favour a fixed period for part of the loan.
Why a Loan Health Check Comes Before Any Application
A loan health check compares your current loan against other options before you commit to anything. It shows your rate, fees, features and remaining term side by side, so you can see whether refinancing is worth pursuing.
Our loan health check looks at what you pay now and what a switch could realistically save. It also looks at your equity. If your property has risen in value since you bought, a lender will usually order a property valuation to confirm what it is worth. That figure affects the loan amount you can borrow and the rate on offer, because a lower loan-to-value ratio can open up more choice. Your valuation result is not something you can predict in advance, so treat any estimate as a guide only.
If you are planning to use equity for another purpose, such as an investment purchase, that changes the structure of the loan. It is worth raising early so the lending is set up in a way that suits your goals. Borrowing more also means higher repayments and more interest over time, so the purpose needs to justify the cost.
What Does the Refinance Process Involve?
The refinance process involves comparing lenders, submitting an application with your income and expense details, and settling the new loan to pay out the old one. Your new lender usually arranges the payout with your existing lender.
You will generally need to show your income, your current loan balance and your regular living costs. If you are self-employed or have a more complex income, the paperwork can differ, and self-employed refinance options may suit you. Timing varies by lender and how quickly your documents are provided, so it helps to have your paperwork ready.
Your current repayments continue until the new loan settles, so keep paying on time. A missed payment during the switch can create problems with your application.
Why Work With a Local Broker in Northmead?
A broker can compare a range of lenders for you and explain the cost of each option in plain terms. This matters most when the numbers are close and the details decide the outcome.
Northmead sits between Parramatta and Baulkham Hills in Sydney's north-west, and many homeowners have loans that have not been reviewed for a while. Our Northmead mortgage broker service is built around your situation, from reviewing your current loan to explaining what a switch would cost and save. You can read more about how we approach refinancing on our main page.
Call one of our team or book an appointment at a time that works for you. We will review your loan, show you the numbers and let you decide whether refinancing is worth it.
Frequently Asked Questions
How do I know if refinancing will save me money?
Compare the monthly repayment on your current loan with the repayment on the new one over the same remaining term. Then add up all switching costs and divide them by your monthly saving to find your break-even point. The switch makes sense when your savings over the time you expect to keep the loan exceed those costs.
Can I refinance while I am on a fixed rate?
Yes, but leaving before the fixed term ends can trigger break costs, depending on your lender and contract. Checking those costs first, or waiting until the term ends, can help you avoid an unwelcome charge.
What is a loan health check?
It is a review that compares your current loan's rate, fees, features and remaining term against other options. It shows whether refinancing is worth pursuing before you submit an application.
Does refinancing restart my loan term?
It can extend your loan if the new term is longer than your remaining term. A longer term lowers repayments but increases total interest. Keeping your repayments at your previous level helps you pay the loan off sooner.
