How Much Could You Save by Refinancing?
Refinancing your home loan may reduce your interest rate, repayments or ongoing fees, but there is no standard amount that every borrower will save.
The potential benefit will depend on your loan balance, current interest rate, remaining loan term, new loan terms and the costs involved in changing lenders.
A lower advertised interest rate may appear attractive, but the real question is whether refinancing improves your overall financial position after all fees, features and long-term costs have been considered.
What Does Refinancing Mean?
Refinancing generally involves replacing your current home loan with a new loan.
You may refinance:
To another lender
To a different loan with your existing lender
To obtain a lower interest rate
To access different home loan features
To change between fixed and variable repayments
To consolidate eligible debts
To access available property equity
To change your loan structure or repayment term
Refinancing is not automatically beneficial simply because another loan has a lower advertised interest rate.
The complete cost of switching should be compared with the expected benefit.
How Can Refinancing Save Money?
A lower interest rate
Even a relatively small reduction in your interest rate may affect your repayments and total interest over time.
The potential saving will depend on the remaining loan balance and term, along with whether rates remain unchanged.
Lower ongoing fees
Your existing home loan may include:
Annual package fees
Monthly account fees
Offset account fees
Loan administration fees
Moving to a loan with lower fees could reduce your ongoing costs. However, you should also consider whether you would lose features you currently use.
More suitable loan features
An offset account or redraw facility may help reduce interest where it is used appropriately.
A loan with a slightly higher interest rate could still provide value when its features suit your circumstances and are used consistently.
Conversely, paying additional fees for features that you rarely use may increase the overall cost of the loan.
Maintaining higher repayments
Where refinancing reduces the required repayment, continuing to pay the previous amount may help reduce the loan sooner.
Whether this is available will depend on the new loan’s terms and repayment conditions.
A Refinancing Savings Example
Assume you have:
A remaining home loan balance of $500,000
25 years remaining
Principal-and-interest repayments
A current interest rate of 6.50%
A potential new interest rate of 6.00%
Using a standard monthly principal-and-interest calculation:
The repayment at 6.50% would be approximately $3,376 per month
The repayment at 6.00% would be approximately $3,222 per month
The difference would be approximately $155 per month
If both rates remained unchanged for the entire 25-year period, the difference in scheduled repayments would be approximately $46,000 before refinancing costs.
This example is illustrative only. It assumes the rates remain unchanged, repayments are made monthly, the loan term remains 25 years and no additional repayments or fees apply.
Actual interest rates and repayments can change. An individual borrower may save more, save less or not save at all.
What Refinancing Costs Need to Be Considered?
Potential refinancing expenses may include:
Discharge fees from your existing lender
Application or establishment fees
Property valuation costs
Settlement fees
Registration charges
Annual package fees
Fixed-rate break costs
Lenders Mortgage Insurance
Broker fees where applicable and disclosed
Legal or administrative expenses
These costs should be deducted from any estimated benefit.
A loan with lower monthly repayments may not provide meaningful savings if the switching costs are high or the loan term is extended significantly.
Work Out the Break-Even Period
The break-even period is the time it may take for the estimated savings to recover the cost of refinancing.
For example:
Estimated refinancing costs: $1,500
Estimated monthly saving: $150
Approximate break-even period: 10 months
In this simplified example, you would need to retain the new loan for approximately 10 months before the estimated monthly savings recovered the initial switching costs.
The calculation can become more complex when:
Interest rates are variable
The loan term changes
Fees are ongoing
A cashback offer applies
LMI is required
You plan to sell or refinance again soon
Other debts are being consolidated
A cashback payment should not be treated as the only reason to refinance. The new loan could still cost more over time if its interest rate, fees or term are less favourable.
Be Careful About Restarting Your Loan Term
One of the biggest refinancing traps is extending the home loan back to a new 25-year or 30-year term.
For example, if you currently have 18 years remaining but refinance into a new 30-year loan, your required repayments may fall because the debt is being spread across a much longer period.
That lower repayment does not necessarily mean the loan is cheaper.
You could pay interest for an additional 12 years and potentially pay more in total, even if the new interest rate is lower.
Where appropriate, compare the new loan using a term similar to the remaining term on your current home loan.
What if You Have Less Than 20% Equity?
If your proposed new loan exceeds the new lender’s LMI threshold, refinancing may result in another LMI premium.
LMI generally protects the new lender and does not automatically transfer from your current home loan.
The new premium could significantly reduce or eliminate the expected refinancing benefit.
The lender will calculate your equity using its accepted property valuation, which may differ from an online property estimate or the value you expect the property could achieve if sold.
What About Fixed-Rate Loans?
Refinancing a fixed-rate home loan before the fixed period ends may result in a break cost.
The amount may depend on:
The remaining fixed period
The loan balance
Changes in relevant interest rates
The lender’s calculation method
The amount being repaid early
A break cost could be small, substantial or may not apply in some circumstances.
Obtain a current payout figure from your existing lender before relying on an estimated refinancing benefit.
Can Refinancing Help With Debt Consolidation?
Refinancing may allow eligible debts to be combined into the home loan.
This could reduce the interest rate or monthly repayments applying to those debts, but it can also create additional risk.
Turning a shorter-term credit card, personal loan or vehicle debt into a long-term mortgage could mean paying interest on it for many more years.
Your home is also used as security for the consolidated debt. If you cannot meet the repayments, the secured property may be at risk.
The total interest and fee cost should be compared carefully, and the repayment term for any consolidated debt should be considered.
Refinancing Is Not Only About the Interest Rate
The lowest advertised rate is not automatically the most suitable home loan.
You should also compare:
The comparison rate
Upfront and ongoing fees
Offset account conditions
Redraw access
Additional repayment restrictions
Fixed-rate limitations
The proposed loan term
Customer service and application timeframes
Eligibility requirements
The estimated overall cost
Some loans with additional features may cost more. The value of those features depends on whether you will genuinely use them.
When Might Refinancing Not Be Worthwhile?
Refinancing may provide limited benefit when:
Your remaining loan balance is relatively low
You expect to sell the property soon
The interest-rate reduction is minor
The switching fees are high
You would need to pay LMI again
A substantial fixed-rate break cost applies
The new loan has higher ongoing fees
The new term is significantly longer
You would lose useful loan features
Your current lender is willing to provide a competitive alternative
You may find that negotiating with your existing lender produces an improvement without requiring a complete refinance.
Any existing-lender offer should still be compared with suitable alternatives.
How Can a Mortgage Broker Help?
A mortgage broker can assess whether refinancing appears likely to provide a meaningful benefit before submitting an application.
This may include:
Reviewing your current loan balance, rate and fees
Comparing suitable options through the broker’s lender panel
Estimating repayments under different scenarios
Identifying potential switching costs
Considering the remaining loan term
Checking whether LMI may apply
Comparing relevant features and restrictions
Estimating the break-even period
Assisting with the application and discharge process
A mortgage broker cannot guarantee a particular saving because interest rates, property valuations, lender policies and individual circumstances can change.
Speak With Homefront Mortgages
You do not need to wait until your current lender contacts you before reviewing your home loan.
Homefront Mortgages can review your existing loan and compare suitable refinancing options available through our lender panel.
We can help you look beyond the advertised rate and consider repayments, switching costs, loan features, the remaining term and the estimated long-term effect.
We do not represent every lender or home loan available in the market. The final loan approval, property valuation, interest rate, loan amount and applicable conditions are determined by the lender.
Important Information
This article provides general information only and does not constitute personal financial, credit, tax or legal advice. It does not take into account your objectives, financial situation or individual needs.
Refinancing may not be suitable or beneficial for every borrower. Any potential saving will depend on the individual loan balance, interest rates, fees, remaining term, repayment structure and switching costs.
Illustrative calculations assume interest rates remain unchanged and may not reflect actual lender calculations or future outcomes.
Loan approval is subject to lender assessment, satisfactory documentation, acceptable property security, valuation and applicable lending criteria. Interest rates, fees, policies, terms and conditions may change. Fees and charges may apply.
