Refinance your home loan: when switching saves money, and when it doesn't

What does refinancing a home loan mean?

Refinancing a home loan means paying out the loan you have with a new one, usually from a different lender. The new lender pays your old lender on settlement day, and from then on you repay the new loan.

People refinance to get a lower rate, a better structure, to release some of the equity in their home, or to roll other debts into the home loan. Moving to a different loan with the same lender is simpler, and it's worth trying first (part 5).

Should I refinance my home loan?

You should refinance your home loan when the saving, over the time you'll keep the loan, is bigger than the full cost of switching, and the new loan suits you at least as well as the old one. That's the test Money Brain uses: the comparison is done in dollars on your actual balance, and the switching costs come off before anything is called a saving.

What this means for you: a lower rate is the start of the question, not the answer. Whether a switch pays is decided by three things the advertised rate doesn't show: the term you take (part 8), the costs of moving (part 6), and how long you'll keep the loan (part 9).

Is my home loan rate too high? How to tell

Your home loan rate is too high if a new customer would be offered a lower rate for the same loan, at the same size and the same share of the home's value. Start with the rate on your latest statement, not the comparison rate, which bundles in fees and answers a different question.

Then look at what your own lender offers new customers for the same type of loan, and what other lenders offer. A lender can offer a new customer a lower rate than the one on a loan it already holds, and an introductory discount or a fixed rate that has ended can leave you on a rate nobody chose. The home loan health check walks through every check, one at a time.

What a gap is worth depends on your balance. As an illustration, on a $500,000 loan with 25 years left, a rate 0.5% lower saves about $2,500 of interest in the first year [1].

When should you refinance your home loan?

The time to look at refinancing your home loan is usually when something has changed: a fixed rate is ending, an introductory discount has run out, your home's value has risen so you now owe 80% or less of it, or you want to use some equity or roll in other debts.

It's usually too early if your loan settled in the last twelve months, or if you're inside a fixed rate whose break cost you haven't had quoted. Once a fixed term has ended, there's no break cost to pay, which makes the end of a fixed rate one of the simplest moments to compare.

How often it's worth looking again is covered on the refinance calculator guide.

Can you get a better rate without refinancing?

Sometimes, yes: the first move is to ask your current lender to match the rate you've found. Your lender may review your rate to keep you, and a lower rate on the loan you already have avoids the discharge fee, the new valuation and the new application.

Have three things in front of you when you call: the rate from your latest statement, your balance and roughly what your home is worth, and the rate you've been offered elsewhere for the same loan. If your lender says no, you've lost a phone call and gained a clear reason to move. The words to use are on the home loan health check.

If your loan is under the 5% Deposit Scheme, a rate change or a product switch with the same lender is fine and keeps the guarantee [4].

How much is LMI on a refinance?

LMI on a refinance is priced from the same rate card as a purchase: as a share of the new loan, rising steeply as the loan gets closer to the home's value. On the one insurer's rate card we hold, a refinance isn't charged extra on top, though the insurer's refinance criteria still apply [2].

These come from one rate card and are illustrations, not quotes. Your premium depends on the lender, the insurer and the loan.

What this means for you: if your loan sits just above 80% of your home's value, LMI can wipe out years of a rate saving. On a $660,000 loan, a rate 0.5% lower saves about $3,300 of interest in the first year [1]; LMI at 82.5% of an $800,000 home is about $7,458 [2], more than two years of that saving. Paying the loan down under the line before you move can change the answer.

Some lenders waive LMI for certain professions, and their rules can treat a refinance differently from a purchase. Suncorp's waiver for medical practitioners, for example, doesn't cover refinancing a loan already held with Suncorp [3]. See the LMI waiver guide.

Does refinancing reset your loan term?

Refinancing can reset your loan term, and that's the cost that quietly cancels the saving. A new loan can be set up over a fresh 30 years even when your old one has 22 left. The repayment falls, which feels like a saving, but you pay interest for eight more years.

An illustration, not a client file: you owe $500,000 with 22 years left, at 6.5%. A new lender offers 6.0% [1].

Keeping your remaining term saves about $39,400 in interest. Taking a fresh 30 years lowers the repayment by $567 a month, but adds about $138,000 of interest compared with staying where you are [1]. So ask for the term you have left, not a new 30 years.

If you'd like the lower repayment as a safety margin, you can take the longer term and keep paying the higher amount. The refinance calculator shows what that does to the interest.

Refinancing costs vs savings: when do you break even?

You break even on a refinance in the month the saving passes what it cost to move. Before that month, refinancing has cost you money; after it, you're ahead.

An illustration: on $500,000 with 25 years left, moving from 6.5% to 6.0% saves about $2,500 of interest in the first year, around $208 a month. If switching costs $1,000, you've made it back in about five months. If it costs $3,000, it takes about fourteen months [1].

That's counted on interest saved. Counted on the repayment alone, which falls by about $155 a month on the same loan, the same costs take about six and a half months and about nineteen months [1]. Either way, a few thousand dollars of costs can take more than a year to win back.

What this means for you: if you might sell, or move the loan again, before your break-even month, refinancing loses money. Put your own figures into the refinance calculator to find yours.

Refinance cashback offers, and what they're really worth

A refinance cashback offer is worth less than it looks if it comes with a higher rate. An illustration: one lender offers $3,000 cashback on a $500,000 loan at 6.2%; another offers 6.0% with no cashback. Over 25 years, the 0.2% difference costs about $1,000 in interest each year [1].

After about three years the cashback is used up, and every year after that the cheaper rate is ahead [1]. So cashback is worth it only if you expect to move again within about three years. Compare the rate first, and treat cashback as a bonus, not the reason.

Cashback offers change often, so this page doesn't list them.

How long does refinancing take?

How long refinancing takes depends mostly on two things: how quickly the new lender approves the loan, and how quickly your old lender releases it. We don't print a number of days or weeks, because both depend on the lenders involved at the time, and a figure we can't stand behind would only mislead you.

What you control is everything before the application: a complete set of documents (part 13), a break cost quoted in writing if you're on a fixed rate, and a clear purpose and amount if you're releasing equity (part 17). What can slow it down is in part 15.

A refinance is a new application: what the new lender checks

A refinance is assessed as a new loan, on your income, debts and living costs today, not on the day your old loan settled. If your income has fallen or your debts have grown, a new lender might lend you less than you owe, and then asking your own lender for a better rate may be the better move (part 5).

APRA expects banks to test whether you could still make the repayments at a rate at least 3 percentage points above the one you'd pay [5]. APRA also limits how much each bank can lend to people whose total debts are six or more times their income [5]. So a loan you repay comfortably today can still fail a new lender's test.

Lenders also look at how long you've been in your job. Firstmac's policy, for example, wants 6 months with your current employer, or 12 months in the same occupation and industry if you've moved more recently, and 2 years of work history overall [6].

Applying adds an enquiry to your credit file, so it's worth knowing a lender is likely to approve before you apply, rather than applying to several to see. If you're retired or self-employed, see home loans for pensioners or self-employed home loans; for a figure on your own pay, see how much can I borrow.

Can you refinance a home loan with bad credit?

You can refinance a home loan with bad credit at some lenders, but it's harder, and the line is drawn tightly. A missed payment or a default narrows the lenders who'll look at it, often at a higher rate.

Firstmac's policy, for example, treats any history of financial defaults, court writs, petitions or bankruptcy as high risk and declines the application. Its one exception is a small non-financial default: listed by a telco or utility, not a financial institution, of $1,000 or less, shown as paid, and with a reasonable written explanation from you [6].

What this means for you: fixing what you can first, and knowing exactly what's on your credit file, matters more than which lender you try. If you're behind on your repayments now, a new loan usually isn't the answer: talk to your lender about hardship first. The National Debt Helpline offers free financial counselling on 1800 007 007.

Can you refinance to release equity?

You can refinance to release equity: the new loan is bigger than what you owe, and the difference is paid to you or used for a purpose you name. Your equity is your home's value less what you owe on it.

Keeping the new loan at or under 80% of the value means LMI doesn't normally apply [2]. An illustration: on an $800,000 home with $500,000 owing, 80% of the value is $640,000, so up to $140,000 could be released before LMI comes in [1]. Whether a lender will lend it still depends on your income (part 14).

Lenders usually ask what the money is for. Firstmac's policy treats any money paid to you as cash out, whatever it's for, and won't accept a purpose like "personal use" or "future investment" without detail. Up to $100,000, with the loan at or under 80% of the value, it needs no further evidence if you give clear details; above $100,000 it wants documents such as a contract of sale, quotes or invoices [7].

Using equity to buy an investment? The structure matters as much as the amount: see using equity to buy an investment property.

Can you refinance to pay off a car loan or credit cards?

You can refinance to pay off a car loan or credit cards by rolling them into the home loan, and the monthly saving can be large. The catch is the term. In the illustration on our debt consolidation guide, $60,000 of card, personal and car debt drops from $1,603 a month to $360 over 30 years at 6.0%, but the interest rises from $16,486 to $69,503 [1].

Repaid over five years inside the home loan instead, it costs $1,160 a month and saves about $6,900 of interest [1]. Same debts, same rate: the term decides whether consolidating saves money or costs it.

Lenders usually want to see that the debts have been paid on time. Firstmac's policy accepts personal debt consolidation where the debts have been well conducted, and relies on your Equifax credit report instead of statements from each lender where every borrower has a satisfactory score and no defaults [7]. Check for an early payout fee on a car or personal loan before you roll it in.

Can you refinance an investment loan?

You can refinance an investment loan, and the same test applies: the saving over the time you'll keep it, against the full cost of moving. A few things differ.

On the LMI card we hold, an investment loan above 80% of the value costs an extra 0.15% of the loan compared with a home you live in [2].

If your interest-only period is ending, a refinance is assessed from the start on the new lender's own rules, just as asking your current lender for an extension is a new application. See interest only or principal and interest.

If one lender holds your home and your investment together against all the loans (cross-collateralised), moving one loan to a better rate means refinancing both. Stand-alone loans, each secured by its own property, can be moved one at a time.

Should you use a refinance broker?

A refinance broker compares loans across lenders for you, works out the break-even, and handles the application, the new lender's paperwork and the discharge with your old lender through to settlement. A bank's staff are paid by the bank and can only offer the bank's own loans. Going direct can be right if your situation is simple and your bank offers you a sharp rate.

The law requires mortgage brokers to act in your best interests, and where a conflict exists, to put your interests first [8]. At Money Brain the recommendation is decided on the lowest net cost to you, and that includes saying stay where you are, or ask your own lender, when that's the better answer.

What does a broker cost you?

How a broker is paid, and the rule Money Brain holds against it, is set out in full on its own page: what a mortgage broker costs.

Your first move

You've seen the costs, the term trap and the break-even. One question is left: does a switch pay on your loan, at your balance, over the time you'll keep it? That's what Money Brain works out before anything goes to a lender.

When you're ready, the closing section below is the simplest way to start.