Pros and cons of refinancing your home loan

author-avatar By 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.

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%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.

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.

Frequently asked questions

Do I need a deposit to refinance my home loan?

You generally do not need to pay a deposit when refinancing your home loan, but there are a range of fees you’ll probably have to pay. You may also have to pay for LMI if the value of your equity in the property (your initial deposit, plus the sum of your principal repayments so far and any capital gains) is less than 20% of the property’s value, or if you’re refinancing the loan to over 80% of its value.

Does refinancing a home loan hurt your credit?

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.

How much equity do I need to refinance my house?

Many loans have a maximum LVR of 95%, which means you can’t borrow any more than 95% of the value of your home. If you want to refinance, this means you must have at least 5% equity in your property. 

Is it expensive to refinance a mortgage?

Refinancing a mortgage can be costly, however, these costs can be recouped over time if you’re refinancing to a loan with a lower interest rate:

  • The discharge fee will generally cost between $200-$400.
  • The setup fees for the new loan can cost $250 on average and up to $1,000.
  • A standard valuation fee alone can be between $200-$500.

See a more detailed breakdown of the costs of refinancing here

How do I know if I should refinance my mortgage?

You may want to refinance your mortgage for a range of reasons, including if you want to reduce your home loan interest rate, if you’re unhappy with your current lender, to consolidate debt, to fund a home renovation or extension, or to fund a big purchase (such as a car) at a lower interest rate.

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 which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

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.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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author-avatar
Dominic Beattie is the Editor of Savings.com.au. He has been publishing articles on finance, business and economics since 2015, having previously worked as a Senior Journalist at financial research firm Canstar before helping to launch Savings.com.au in November 2018. Dominic aspires to help everyday Australians discover simple and effective ways to comfortably manage their finances and save money, without sacrificing their joie de vivre. His commentary has featured on various news outlets, including: Channel 7 News, News.com.au, Domain, Realestate.com.au, Daily Mail, Radio 2NURFM and DrWealth.

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