What is refinancing a home loan & what are the pros and cons?
- One of the primary reasons borrowers refinance is to reduce costs by moving to a home loan with a lower interest rate.
- Timing matters when refinancing, and the right timing typically depends on individual circumstances.
- Calculating your break-even point helps determine if refinancing will genuinely save you money.
Unlike the ‘olden days’ when it seemed borrowers were stuck with one lender for their entire loan term, it is now very common for Australians to refinance their mortgage with a different bank or lender or to just switch loan products with their current one.
In fact, refinancing activity has surged in recent years. More than 640,000 mortgages (both internal and external for investors and owner occupiers) were refinanced in 2025, highlighting how competitive the Australian home loan market has become.
Even so, past surveys of homeowners have found as many as half of all mortgage borrowers are not even aware of what their current rate of interest is, let alone whether it is competitive, which is surprising given a mortgage is typically one of the biggest financial commitments most people will have.
But before you decide whether to refinance, it’s important to understand how it works.
What is refinancing?
Refinancing is the process of replacing your existing mortgage with a new one. The new loan pays off your old one, and you continue repayments under the new structure.
It is often done to access benefits such as
- A lower interest rate
- Reduced fees
- More flexible loan terms and features
- Special offers
- Debt consolidation
- Access to equity
There are two main types of refinancing:
- When you move your home loan to another lender, it is called an external refinance.
- When you refinance your loan with your existing lender, it’s an internal refinance.
See also: How to refinance your home loan
With so many borrowers refinancing, there must be great savings on offer, right? But it’s not always the right move for everyone.
When is it a good time to refinance?
There’s no single rule for when you should refinance. The right timing depends on your personal financial position and goals.
However, there are a few clear signs that it may be worth taking a closer look.
- You suspect your loan isn’t as competitive as it once was
- Your interest rate looks higher compared to the market
- You’ve built up a decent amount of equity
- You’re considering borrowing more
- You’re looking for features your current loan doesn’t offer (e.g. offset account)
- You want to change your interest rate structure (i.e. switch between variable and fixed)
When refinancing might not make sense?
While refinancing can offer benefits, there are also situations where it may not be worthwhile.
- Your loan is still relatively new (you haven’t built up equity yet, so your LVR could remain high)
- Your financial position hasn’t changed (or, worse, declined)
- The potential savings DO NOT outweigh the costs
- You’re locked into a fixed-rate loan and exiting can trigger significant break costs
- Your property value has dropped
- You’d be giving up useful loan features
- Take note: In some cases, asking your current lender for a better rate (repricing) may deliver similar savings without the need to refinance.
Work out how much you could save when you refinance using Savings.com.au’s Mortgage Switching Calculator.
Savings.com.au's two cents
For many people, the focus when buying a home is the property itself, rather than the loan. But your home loan is just as important, and reviewing it regularly could make a meaningful difference over time.
Your competitive interest rate years ago may not be competitive today. You may now need some home loan features to help you manage or pay off your mortgage faster, and your current mortgage doesn't have them.
Ultimately, refinancing is not going to suit every person in every situation. It's wise to consider your individual circumstances and weigh up all of the pros and cons before making a move to switch loans.
Pros of refinancing
Switch to a lower interest rate
One of the biggest draws of refinancing is the ability to move to a more competitive rate. Even a small reduction can lower your monthly repayments and reduce the total interest paid over time.
Access your equity
When you refinance your home loan, you may be able to access some equity you’ve built up in your home (the difference between your property value and outstanding loan balance). This can be used for re-investing, renovations, debt consolidation, or other major expenses like taking a holiday or purchasing a new car.
However, bear in mind that lenders generally limit borrowing to around 80% of the property’s value without requiring lenders mortgage insurance (LMI), reason why you may not be able to access all your equity.
Greater flexibility
Refinancing allows you to adjust your home loan to suit your current needs. For example:
- You may extend your loan term to reduce repayments
- You may shorten your loan term to potentially save on interest
- You may switch between fixed and variable rates or split your rate
See also: What is a split home loan?
Cons of refinancing
Costs and fees
It’s important to do your research before you consider refinancing, as there can be a number of fees involved. These may include application or establishment fees, property valuation fees, settlement or discharge fees, and break costs (if exiting a fixed loan early).
Depending on your situation, these costs can add up to hundreds or even thousands of dollars, potentially outweighing the overall benefit of switching.
Lenders Mortgage Insurance
If your equity is assessed as less than 20% of the property value (effectively making your LVR above 80%), your lender may require you to pay LMI when you refinance. This protects them if you default on your home loan.
Now you might be thinking, “But I’ve paid LMI in my current loan, why should I pay it again when I'm switching?”
Note that LMI is not transferable between lenders, so even if you paid it previously, you may need to pay it again if you switch lenders and your LVR ends up needing the insurance.
Impact on your credit score
Most people don’t realise that every application for credit goes into their personal credit file. Refinancing your home loan often may impact your credit score. However, this typically improves over time if repayments are made consistently.
Is it worth refinancing your mortgage? Calculate your break-even point
Whether refinancing is worth it or not comes down to one key question: Will the savings and benefits outweigh the costs?
Refinancing usually comes with upfront costs, such as application, valuation, or discharge fees.
The break-even point is how long it takes for your savings (which you’ll typically get from a lower interest rate) to cover those costs. It’s the moment when refinancing stops costing you money and actually starts saving you money.
If you keep the loan beyond this point, the savings build up and eventually exceed those costs, which then makes refinancing worthwhile. If not, you could end up worse off.
To illustrate:
Total refinancing costs – $2,000
Monthly savings – $100
Break-even point – 20 months
When you stay longer than 20 months, you start saving money.
Use our Refinancing Costs Calculator to calculate how much refinancing could cost you.
How does refinancing work?
While processes vary slightly between lenders, refinancing a home loan typically involves the following steps:
Compare refinance home loans
If you're thinking of refinancing your home loan, it pays to do your research to ensure any new loan you switch to offers a good rate and the features that best meet your needs.
The table below features some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
Apply with the lender
Once you’ve identified and chosen the loan that best meets your needs, prepare all the necessary documents and additional information that may be required by the lender.
Generally, you need to have your personal and financial information ready, along with the details about your current home loan and your property.
Exit your old home loan
This is the stage where your new lender will communicate with your old lender (if you’re refinancing externally) to discharge you from your old home loan.
After this, your new home loan will reach the 'settlement' stage, which is when the actual funds are disbursed to pay off your old home loan. Barring any delays, you should be able to reach settlement within weeks.
How much can refinancing save me?
In most cases, refinancing can save you quite a lot, both in the short term and especially over the long term.
Earlier analysis by the Australian Competition and Consumer Commission (ACCC) found borrowers with older loans often pay significantly higher rates than new customers.
Even a 1 percentage point reduction could potentially save tens of thousands of dollars over time, depending on your loan size and term.
Here’s a sample of how much you might be able to save by refinancing from a 5.90% p.a. home loan with a $500,000 balance to one that has 5.50% p.a. rate:
Outstanding loan balance | $500,000 |
Monthly repayments at 5.90% p.a. | $3,191 |
Monthly repayments at 5.50% p.a. | $3,070 |
Monthly savings by refinancing | $121 |
Savings over the life of the loan | $36,172 |
Calculated using Savings.com.au's Refinance Home Loan Calculator. Assuming a 25-year loan term with monthly repayments.
What kind of savings can refinancing deliver?
Savings depend on the loan size and the rate gap.
As a rough guide, if you shave 0.50% p.a. off a $700k loan, that’s about $3,500 a year in interest. If you shave 1.00% p.a., it’s about $7,000 a year. Bigger balances or bigger rate gaps obviously move the needle faster.
The real win is when you combine a sharper rate with the right structure, because that’s when people not only save money, they build momentum.