Pros and cons of refinancing your home loan

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on April 12, 2021
Pros and cons of refinancing your home loan

It's now easier than ever to shop around for a good deal on your home loan. If you're not happy with your current one, then you can refinance.

Unlike the ‘olden days’ when it seemed like borrowers were stuck with one lender for their entire loan term, it is now very common for people to refinance their mortgage with a different bank or lender, or to just pick a different loan with their current lender. 

As many as half of all mortgage borrowers are not even aware of what their current rate of interest is on their home loan, let alone whether it is competitive to what’s available in the market. While this is down from a shocking 71% in 2016, it's still a very high number, especially when considering how big of an expense mortgage repayments can be

But before you consider whether you should test the market, it is critical to know the ins and outs of refinancing your home loan to another lender.

Compare refinance home loans

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner-occupiers.

Lender

Variable
More details
UNLIMITED REDRAWSSPECIAL OFFER
  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
UNLIMITED REDRAWSSPECIAL OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
Variable
More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
AN EASY DIGITAL APPLICATION

Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
Variable
More details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
Variable
More details
NSW/VIC/SA METRO & INNER REGIONAL AREAS$5000 CASHBACK. T&Cs APPLY.
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
NSW/VIC/SA METRO & INNER REGIONAL AREAS$5000 CASHBACK. T&Cs APPLY.

Variable Home Loan (Principal and Interest)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of May 24, 2022. View disclaimer.

What is refinancing?

Refinancing is a term used to describe the changeover of a mortgage to a different organisation or account. It is often done when there are appealing benefits such as a lower interest rate, more flexible loan terms and features, smaller fees, special offers or debt consolidation requirements.

There are two main types of refinancing:

  • When you move your loan to another financial lender, it is called an external refinance.
  • When you refinance your home loan with your existing lender, it’s known as an internal refinance.

Refinancing is now very common in Australia. In May 2020, record-low interest rates saw refinancing to different lenders grow to its highest ever level after a 63% increase year-on-year. In January 2021 more than $15.6 billion worth of loans were refinanced, and the near 500,000 refinanced mortgages in 2020 represented about 8% of all home loans. 

See also: How to refinance your home loan

With so many people refinancing, there must be great savings on offer, right? 

How much can refinancing save me?

In some cases, refinancing can save you quite a lot, both in the short-term but especially long-term. The Australian Competition and Consumer Commission (ACCC) said in 2020 that borrowers with home loans between three and five years old paid an average of 58 basis points (0.58%) more than new loans. Switching from one of these loans could save the average customer $1,400 in the first year and $17,000 all up. 

When comparing two similar loans, a 100 basis point reduction in the interest rate (such as 3.50% p.a to 2.50% p.a) could save you tens of thousands of dollars over the life of your loan (potentially more than $100,000). To work out what your monthly repayments might be and how much you could save by refinancing, you can use our home loan repayment calculator.

Pros and cons of home loan refinancing

Like any financial product, refinancing does not suit every borrower. Here's a list of some of the pros and cons involved in refinancing a home loan.

Pros:

  1. Switch to a lower interest rate: one of the primary reasons people refinance is because they want a lower interest rate. Having a lower rate can not only reduce your monthly repayments but can potentially help you pay your loan off sooner as well. 
  2. Equity Access: when you refinance your home loan, you will have access to any equity you have paid over the course of your mortgage. If you choose, this could be used for things like re-investing, renovations, taking a holiday, purchasing a new car and much more. However, before you go spending too much of your equity, it’s important to remember that the more equity you have, the better chance you have of getting the very best interest rate you can from your new lender.
  3. Flexibility: when you refinance your home loan, you can lengthen or shorten the loan term (i.e. how many years it takes to pay off the loan) to suit your needs. By increasing your loan term, you can reduce your regular payments over a longer period of time. By decreasing your loan term, you may increase your payments but pay less interest overall.

Cons:

  1. Fees: It’s important to do your research before you consider refinancing as there can be a number of fees involved. A few of these include exit fees, valuation fees, application fees, and break fees. It could cost hundreds or even thousands of dollars to switch if you're not careful. 
  2. Lenders Mortgage Insurance: If your equity is less than 20% of the property value, your lender may require you to take out Lenders Mortgage Insurance (LMI) when you switch. This protects the lender if you default on your home loan, but could end up putting you seriously out of pocket.
  3. Your credit score: Most people don’t realise that every application for credit goes into their personal credit file. Refinancing your home loan often could impact your credit score which can make it difficult to receive lower interest rates for future applications.

Savings.com.au's two cents 

If you’re thinking about refinancing but have only just taken out a mortgage, it is still possible for you to do so. In fact, it's not uncommon at all for people to refinance their home loans within just 3 months of buying their property! This makes sense if you think about it. Buying a home for most people really focuses on just that – the home or property. Very rarely does it involve spending more time on finding the right home loan, but the loan is just as important. 

Ultimately, refinancing is not going to suit every person in every situation. It is important to look at your individual circumstances and weigh up all of the pros and cons before making a move to do so. For help making your decision, play around with Savings.com.au's Mortgage Switching Calculator and Refinancing Costs Calculator. 


Image via Unsplash 

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Dominic Beattie is the Editor of Savings.com.au. He has been publishing articles on finance, business and economics since 2015, having previously worked at financial research firm and comparison site Canstar before helping to launch Savings.com.au in November 2018. Dominic's commentary has featured in various news outlets, including: Channel 7 News, News.com.au, Yahoo Finance Australia, Domain, Realestate.com.au, Daily Mail and Radio 2NURFM.

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