Refinancing 101: When It Makes Sense, When It Doesn't, and How to Decide
- Refinancing means replacing your current home loan with a new one — either with your existing lender or a different one.
- The break-even point is the most important number in any refinancing decision: how many months does it take for your savings to exceed your costs?
- Total refinancing costs in Australia typically range from $1,000 to $3,000, but can be higher if your loan has break costs (common with fixed-rate loans).
- A 0.5% rate reduction on a $600,000 loan saves approximately $3,000 per year — covering typical costs in 4-12 months.
- Refinancing makes sense when: your fixed term is ending, your equity has grown, your income has improved, or your lender is pricing you unfairly.
- Refinancing rarely makes sense when: you're planning to sell soon, your loan is nearly paid off, or the savings don't exceed costs within your planned holding period.
Refinancing is the most powerful tool a borrower has after settlement — but only if used at the right time and for the right reasons. Used well, it can save tens of thousands of dollars and fund major life goals. Used poorly, it can cost money, reset your loan progress, and create unnecessary stress.
This guide covers everything you need to know to make a clear-eyed decision about whether refinancing makes sense for your specific situation.
What Is Refinancing?
Refinancing means replacing your existing home loan with a new one. The new loan pays out your old loan, and you begin repaying the new loan under its terms — typically a different interest rate, different lender, and potentially different loan features.
You can refinance:
With your existing lender (a rate review or product switch — simpler, fewer costs)
With a new lender (more work, more costs, but often access to better rates and products)
The Break-Even Calculation: The Only Number That Matters
Before doing anything else, calculate your break-even point. This is how long it takes for your monthly savings to offset the cost of refinancing.
Break-Even Formula Break-Even (months) = Total Refinancing Costs / Monthly Saving Example: Total refinancing costs = $2,400. Monthly saving from lower rate = $200/month. Break-even point = 12 months. If you plan to stay in the property (or keep the loan) for more than 12 months, refinancing makes financial sense.
Worked Break-Even Example: $600,000 Loan
| Scenario | Current Rate | New Rate | Rate Saving | Annual Saving | Costs | Break-Even |
|---|---|---|---|---|---|---|
| Owner-occupier, P&I | 6.50% | 6.00% | 0.50% | ~$3,000 | $2,200 | ~9 months |
| Owner-occupier, P&I | 6.50% | 5.85% | 0.65% | ~$3,900 | $2,200 | ~7 months |
| Investment loan, IO | 6.80% | 6.20% | 0.60% | ~$3,600 | $2,500 | ~8 months |
| Fixed loan with break cost | 5.20% fixed | 6.00% variable | N/A | Negative | $2,200 + $8,000 break cost | May never break even |
Note: Break costs for fixed loans can eliminate all savings — always check with your lender before breaking a fixed rate.
What Are the Costs of Refinancing?
| Cost Item | Typical Range | Notes |
|---|---|---|
| Discharge fee (outgoing lender) | $150 – $400 | Fee to formally discharge your current mortgage from title |
| Application/establishment fee (new lender) | $0 – $600 | Many lenders waive this, especially for brokers |
| Valuation fee | $200 – $500 | Lender requires a fresh property valuation |
| Settlement fee | $100 – $300 | Legal/administrative fee to process settlement |
| Mortgage registration fee | $100 – $200 | Government fee to register the new mortgage on title |
| LMI (if new LVR > 80%) | $4,000 – $30,000+ | Only applies if your equity has decreased. Major refinancing trap. |
| Break costs (fixed loans only) | $0 – $20,000+ | Can make refinancing completely unviable. Get a quote from your lender. |
The LMI Trap in Refinancing
If your property value has fallen since you purchased — or if you've borrowed against equity since then — your LVR at refinancing may be above 80%. This can trigger LMI with the new lender, which can cost $5,000-$30,000+, completely eliminating any rate savings. Always check your estimated LVR before initiating a refinance.
The Fixed Rate Break Cost Trap
Fixed rate loans have break costs calculated based on the difference between your contracted rate and current wholesale rates, multiplied by your remaining loan balance and remaining fixed term. If interest rates have fallen significantly since you fixed, break costs can be enormous — sometimes $10,000-$30,000+. Always get a written break cost quote from your lender before making any decision about breaking a fixed rate.
6 Strong Reasons to Refinance
1. Your Fixed Rate Term Is Ending
When a fixed rate expires, your loan typically reverts to a standard variable rate, which is often significantly higher than what you'd get by actively refinancing to a competitive product. The six months before your fixed term ends is the optimal window to research and initiate refinancing.
2. You're Paying Your Lender's Loyalty Tax
Many lenders offer their best rates to new customers while existing customers pay a premium. Review your current rate against what your lender is advertising for new customers with similar loan profiles. If there's a gap of 0.3% or more, you're paying a loyalty tax. Your lender may match a competitive rate if you threaten to leave — a conversation worth having.
3. Your Property Value Has Grown Significantly
If your property has appreciated, your LVR has improved. A lower LVR often qualifies you for better interest rate tiers. For example, moving from an 85% LVR to a 75% LVR can unlock rates 0.2-0.4% lower, depending on the lender.
4. Your Financial Position Has Improved
If you've received significant pay increases since your original application, cleared debts, or improved your credit profile, you may now qualify for better rates or products you weren't eligible for at origination.
5. You Want to Access Equity for a Specific Purpose
If significant equity has built up, refinancing allows you to release equity for a deposit on an investment property, renovations, or other financial goals.
6. Your Current Loan Features No Longer Suit Your Needs
Needs change. You might now want an offset account. Or you want to switch from interest-only to principal and interest. Sometimes the right product for your current situation is at a different lender entirely.
4 Poor Reasons to Refinance
1. The Rate Dropped by Only 0.1-0.2%
A 0.2% rate reduction on a $500,000 loan saves approximately $1,000 per year. With refinancing costs of $2,000-$3,000, you'd need over two years just to break even.
2. You're Planning to Sell Soon
If you're selling within 12-18 months, refinancing costs won't be recovered through savings.
3. Your Loan Is Nearly Paid Off
With a small loan balance remaining, the dollar saving from a lower rate is minimal. The costs and administrative effort of refinancing rarely make sense in the final 5 years of a loan.
4. You're Resetting Your Loan Term Unnecessarily
Refinancing a loan with 18 years remaining into a new 30-year loan reduces your monthly repayments but dramatically increases the total interest paid over the life of the loan. If you must refinance, match your remaining term — refinance into an 18-year loan, not a 30-year loan.
Frequently Asked Questions
How long does refinancing take?
Refinancing typically takes 2-4 weeks from application to settlement. Complex situations or slow lenders can extend this. A broker typically manages this process, keeping it moving and following up on your behalf.
Can I refinance if I'm self-employed?
Yes. Self-employed refinancing requires 2 years of tax returns and business financials. Some lenders assess self-employed borrowers more conservatively, but specialist lenders and low-doc options exist.
What are break costs and how are they calculated?
Break costs apply when you exit a fixed rate loan before the end of the fixed term. They are calculated based on the movement in wholesale interest rates between when you fixed and today. The formula is complex — always get a written quote from your lender before making any decision.
Will I have to pay LMI when refinancing?
Only if your LVR is above 80% at the new lender's assessment. Most owner-occupiers who have owned their property for several years and haven't significantly increased their loan will be well below 80% LVR.
Disclaimer: This article provides general information about home loan refinancing in Australia. It does not constitute financial advice. Your specific savings, costs, and break-even point depend on your individual loan terms, current rates, property value, and lender policies. Speak to a qualified mortgage broker to obtain an analysis specific to your situation.
Written by Luke Drake | Authorised Credit Representative (CRN: 565112) | Frontier Finance Co