Refinancing

When is refinancing actually worth it?

A practical break-even test for deciding whether changing home loans is likely to leave you better off.

Short answer

Refinancing is usually worth considering when the expected savings or structural benefits are greater than the switching costs, and you expect to keep the new loan long enough to recover those costs. A lower advertised rate alone is not enough.

Use the break-even test

Add the discharge, application, valuation, settlement, government and any fixed-rate break costs. Then divide that total by the estimated monthly saving. The result is the approximate number of months needed to break even.

Compare repayments over the same remaining loan term.
Include annual package and account fees.
Check whether refinancing resets the loan to a longer term.
Value useful features such as offset, redraw or split loans.

When it may not stack up

Refinancing may offer little value if the balance is small, the break-even period is long, lender's mortgage insurance applies again, or you are likely to sell soon. It can still make sense when you need a better structure, but that benefit should be identified clearly.

A simple refinancing example

Suppose switching costs total $1,200 and the comparable new loan saves $150 a month. The simple break-even point is eight months. If you expect to keep the loan for several years, the change may be worthwhile. If you may sell in six months, it probably is not. Run the comparison again using a slightly smaller saving because variable rates can change. This gives you a more conservative result instead of relying on the best possible outcome.

Check the quality of the new loan

A cheaper rate can be poor value if the loan has expensive package fees, weak digital banking, limited offset access or restrictions that do not suit you. Compare the interest rate, comparison rate, annual fees, repayment options and service experience. If cash flow is the priority, compare actual repayments. If long-term cost is the priority, compare total interest using the same remaining term. Extending the loan term can make the monthly figure look better while increasing total interest.

Approval still matters

Refinancing is a fresh credit application. The lender will reassess income, living expenses, liabilities, credit history and the property. A lower property valuation, reduced income or new debt can affect approval and may increase the LVR. Do not close your existing loan or make irreversible commitments before the replacement loan is formally approved and ready to settle. If cash out is involved, be ready to explain the purpose and provide any evidence the lender requires.

Questions to ask before you proceed

What is the net saving after every discharge, application, valuation and ongoing fee?
How long is the break-even period if the remaining loan term stays the same?
Which valuation, income or policy issue could still change the approval or pricing?

Key takeaway

Calculate the net benefit and break-even period before changing lenders.

Ready to compare your own loan? Start with a home loan refinance review.

Official guidance: Moneysmart: Switching home loans

This is general information, not personal financial, tax or legal advice. Lending criteria, fees and eligibility vary.

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