Refinancing

The question is not whether a lower rate exists

There is almost always a lower rate somewhere. That is not the same as refinancing being worth it.

The useful question is whether moving leaves you better off once the costs of switching, the structure of the new loan, and what you are planning over the next few years are all accounted for. Sometimes the answer is yes and obviously so. Sometimes the answer is that restructuring where you already are is the better move.

What it actually costs to move

Refinancing is not free, and the costs are easy to overlook when you are focused on the rate.

• Discharge fee from your existing lender
• Break costs, if any part of your loan is fixed. These can be significant and depend on how rates have moved since you fixed
• Application, valuation and settlement fees with the new lender, though these are often waived
• Government registration fees for discharging and registering the mortgage
• Lenders mortgage insurance again, if your equity is below 20%. LMI is generally not transferable between lenders, so you could pay it twice

That last one catches people. If you paid LMI when you bought and your equity has not yet reached 20%, refinancing can mean paying it a second time, which can wipe out years of rate savings.

The trap that is easy to miss

Refinancing usually resets your loan term.

If you are eight years into a 30 year loan and you refinance to a new 30 year term, your repayments drop, which feels like a win. But you have just added eight years of interest to the back end. The monthly saving is real; the total cost may have gone up.

You can generally ask for a shorter term to match your remaining period. It is worth doing deliberately rather than accepting the default.

When a fixed rate is ending

This is the most common reason people start looking, and timing matters.

When a fixed term expires, most loans revert to a variable rate that is rarely the sharpest available. Lenders are not obliged to put you on a competitive rate, and many do not.

Two practical points.

Start before it expires, not after. Refinancing takes time, and if you wait until the reversion happens you can spend weeks or months on a rate you would not have chosen.

Check break costs before doing anything early. If you move before the fixed term ends, break costs may apply and can be substantial.

Structure matters more than most people think

Rate is the visible part. Structure is the part that determines what you can do next.

Offset accounts reduce the interest charged on your loan by the balance held in a linked transaction account, while keeping the money accessible. Redraw lets you access extra repayments you have already made, but is treated differently, including for tax purposes if the property ever becomes an investment. Which one suits you depends on what you are planning.

Splitting a loan between fixed and variable portions is possible with many lenders, and can suit people who want some certainty without giving up all flexibility.

Loan purpose and structure also affect your next move. If you are likely to buy an investment property, keep the current home, or access equity, how the loan is set up now can make that easier or harder later.

Accessing equity

If your property has grown in value or you have paid the loan down, you may have usable equity. It is commonly used to fund a renovation, a deposit on an investment property, or to consolidate other debt.

Two things worth understanding.

Equity is not the same as available equity. Lenders will generally lend against a proportion of the property's value, not all of it, so your usable figure is lower than the gap between your loan and the value.

Consolidating debt into a mortgage lowers repayments but extends the term. Moving a short term debt into a 25 or 30 year loan can cost more overall even though the monthly figure improves. Sometimes it is still the right call. It should be a deliberate decision.

Refinancing is a new application

It is easy to assume that because you already have a loan, another one is a formality. It is not. A refinance is assessed like any other application, against current serviceability requirements, current income, and current expenses.

That matters if your circumstances have changed. Reduced income, a new dependant, recently going self-employed, or additional debts can all mean you do not qualify for the same borrowing you did before. It is worth checking your position before starting rather than discovering it partway through.

What I would want to look at

• Your current loan details, including rate, balance, remaining term and any fixed portion
• Whether break costs apply
• Your current property value, roughly
• Your income and expenses as they are now, not as they were when you took the loan
• What you are planning over the next few years