Common Mistakes When Refinancing and How to Avoid Them

Refinancing can reduce your interest costs, but only if the savings outweigh what it costs to switch. For Elwood homeowners, the aim is a loan that suits where you are heading, not just one with a lower number on the front page.

Refinancing means replacing your current loan with a new one, either with a new lender or with your current lender. Done well, it can bring your repayments down, give you more useful features or free up equity for your next goal.

What Are the Benefits of Refinancing a Home Loan?

The main benefits of refinancing are a lower interest rate, lower repayments, loan features that suit you better, and access to equity. Which one matters most depends on your goals.

A lower rate is the most common reason. Even a small rate difference can add up over the life of a loan, depending on your balance and lender. You can also move to a loan with an offset account or redraw facility, switch between variable and fixed, or restructure your loan term. Our home loans team can show you what is on offer. Each option has a trade-off. A longer term can lower your repayments, but you will usually pay more interest over time.

Common Mistake: Refinancing Without Counting the Switching Costs

The most common mistake is chasing a lower rate without adding up the costs of switching. Those costs can include a discharge fee on your old loan, an application fee on the new one, and a break fee if you are leaving a fixed rate early.

If you have less than 20 per cent equity, you might also have to pay lenders mortgage insurance on the new loan. Under ASIC guidance, a switch should produce overall cost savings that outweigh any lost benefits, and that includes any broker fees. Ask for every cost to be listed before you decide. Victoria does not charge mortgage duty, so that is one cost you will not see on a Victorian refinance.

Rate Savings in Practice: An Illustrative Example

A lower rate can reduce monthly repayments noticeably, but the saving is only real once you subtract the costs of switching. This example uses an illustrative rate of 6.75% p.a. and is not a current offer.

Consider an Elwood homeowner with $700,000 owing over 25 years remaining. At 6.75% p.a., principal and interest repayments come to about $4,836 a month. They refinance to a loan at 6.25% p.a. over the same 25 years, and repayments drop to about $4,617 a month. That is roughly $219 a month, or about $2,628 a year, using these illustrative rates only.

Say switching costs total $1,500. The homeowner recovers that in under 7 months. Had the costs been $6,000, it would take closer to 27 months. If they plan to sell or restructure sooner, the switch may not pay off. The same sum, run against your own numbers, shows whether a switch makes sense.

When Is a Fixed Rate Expiring a Good Time to Refinance?

When your fixed rate period is ending is often a sensible time to review your loan, because you can leave without a break fee. Many lenders move you to their standard variable rate at expiry, which may be higher than rates available elsewhere.

A break fee applies only when you end a fixed loan before its term finishes. Starting the process a few months before expiry gives you time to compare options. Our fixed rate expiry page explains your choices, including re-fixing, moving to variable or splitting the loan. Splitting keeps some certainty in your repayments, while the variable part gives you flexibility. The trade-off is that you will not benefit fully if rates fall on the fixed portion.

Can You Refinance to Access Equity?

Yes, you may be able to refinance to borrow against the equity in your home, subject to a lender's valuation and assessment. Equity is the gap between your property's value and what you owe.

People use it for renovations, an investment purchase or consolidating other debts. Our equity release page covers how it works, and debt consolidation is worth a look if you carry other balances. Borrowing more raises your total debt and your interest costs. If a longer term is used to make repayments look smaller, you will pay more interest overall. Lenders must also check the loan suits your needs and that you can afford it.

For tax, interest is generally deductible only on the part of a loan used to produce income. If part of the loan will fund an investment, speak to your accountant before you proceed.

Does Refinancing Affect Special Schemes?

It can. If your loan is under the Australian Government 5% Deposit Scheme, moving to a non-participating lender ends the scheme's benefit. You may be able to move to another participating lender and keep it, provided you do not increase the loan or extend the term.

If you used Help to Buy, there are separate buyout rules and approvals. Check these before you apply, because the wrong move could cost you more than a lower rate saves.

What Does the Refinance Process Involve?

The process starts with a review of your current loan, followed by comparing options, applying, and then settlement, where your new lender pays out the old one. Your broker handles most of the paperwork.

You will need to show your income, expenses and debts so the lender can assess the loan. They check that it suits your needs and that you can repay it. Lenders also apply a serviceability buffer, which APRA has confirmed stays at 3 percentage points above the loan rate. Some borrowers who qualified before may no longer meet standard criteria, but lenders can assess these cases individually. A loan health check is a low-effort first step, and our local mortgage broker in Elwood team can walk you through it.

If you are unsure whether to switch, we will tell you honestly. Sometimes the right answer is to stay put or ask your current lender for a better deal. Call one of our team or book an appointment at a time that works for you, and let us help you decide with confidence.

Frequently Asked Questions