Many Australians pay more for their mortgage than they need to, simply by staying with the same lender. Here’s how refinancing works, what it costs, and how to tell if switching is worth it.
Refinancing means taking out a new home loan to pay off your existing one. The new loan might be with a different lender, or a new deal with your current one.
People refinance to get a lower interest rate, change loan features, switch from fixed to variable, consolidate debts, or access equity in their home for renovations or investments.
The loyalty tax
One of the biggest reasons to refinance is what’s often called the loyalty tax. Lenders frequently offer their sharpest rates to new customers, while existing borrowers stay on higher rates unless they ask for a better deal.
The ACCC found in a 2020 inquiry that existing borrowers were often paying much more than new customers, and the longer someone had their loan, the bigger the gap tended to be.
On a $600,000 loan, a rate that’s half a percentage point lower can save around $2,000 a year in repayments.
How to refinance
The first step is often simply to call your current lender and ask for a lower rate, quoting offers from competitors. Many lenders will cut rates to keep a customer.
If they won’t, you can apply for a new loan elsewhere. The new lender will assess your income, expenses and credit history, and usually value your property. Once approved, it pays out your old loan.
Mortgage brokers, who are paid commissions by lenders, can compare loans and handle the paperwork.
Costs to check
Switching lenders can involve costs, including discharge fees from your old lender, application or settlement fees for the new loan, and government registration fees.
If you’re on a fixed rate, breaking the loan early can trigger break costs, which can be large.
If you owe more than 80% of your home’s value, you may have to pay lenders mortgage insurance again with a new lender.
Comparison rates and cash-back
When comparing loans, look at the comparison rate, which includes most fees and charges, as well as the advertised interest rate.
Some lenders offer cash-back deals, often thousands of dollars, to attract refinancers. They can be worth having, but a lower interest rate usually saves more over time than a one-off payment.
Making it work
Refinancing can reset the length of your loan to 30 years. That lowers repayments but can increase the total interest paid. Keeping repayments at the old level can help pay the loan off faster.
Higher interest rates can also make refinancing harder, because lenders test whether borrowers could afford repayments if rates rose further. Some people find they can’t borrow as much as they owe, a situation sometimes called being a “mortgage prisoner”.
It’s worth reviewing your home loan at least once a year to make sure you’re not paying more than you need to.
