How to refinance your mortgage and save money

Explore the benefits, steps, and common pitfalls of mortgage refinancing in Australia to make informed financial decisions

By Thais On 25 de February de 2025 Last updated on 26 de February de 2025

What is Mortgage Refinancing?

Mortgage refinancing involves replacing your existing home loan with a new one—either with your current lender or a different lender. This is done to secure a better interest rate, adjust loan terms, or tap into home equity. The primary goal is to improve financial stability and reduce costs over time.

Why should you refinance your mortgage?

Refinancing a mortgage can offer several advantages, including:

1. Lower interest rates

Interest rates fluctuate over time, and if you secured your mortgage during a high-interest period, you may now be eligible for a significantly lower rate. Even a slight reduction in interest can lead to thousands of dollars in savings over the life of the loan. Lower rates can also provide an opportunity to reduce your loan term without significantly increasing your repayments, allowing you to pay off your mortgage faster.

2. Reduced monthly repayments

A lower interest rate or extended loan term can reduce your monthly mortgage repayments, freeing up cash for other expenses or savings. Lower repayments can help you improve your cash flow, making it easier to manage household expenses, invest in other opportunities, or build an emergency fund. However, it’s important to balance lower repayments with the long-term cost of the loan, as extending the term could lead to more interest paid overall.

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3. Switching from a variable to a fixed rate (or vice versa)

Homeowners who prefer predictability in repayments might switch from a variable-rate loan to a fixed-rate mortgage, locking in a stable interest rate for a set period. This can be beneficial when interest rates are expected to rise, as it provides financial certainty. Conversely, if you started with a fixed-rate mortgage but want to take advantage of lower rates or more flexible repayment options, switching to a variable-rate loan could be a strategic move. Some borrowers also opt for a split loan, where part of the mortgage is fixed and the other part remains variable, offering a balance between security and flexibility.

4. Accessing home equity

If your home has increased in value, you may be able to access equity for renovations, investments, or other large expenses. Many lenders offer competitive rates for equity release, allowing homeowners to fund home improvements, purchase an investment property, or even support major life expenses like education costs or medical bills. Using home equity can be a cost-effective alternative to taking out personal loans or using high-interest credit cards, as mortgage rates tend to be lower. However, it’s essential to borrow responsibly and ensure you can manage the repayments.

5. Debt consolidation

Refinancing can be used to consolidate multiple high-interest debts, such as personal loans or credit card debt, into a single mortgage with a lower interest rate. This can simplify financial management by reducing the number of repayments and potentially lowering the overall interest burden. However, consolidating debt into a mortgage means spreading the debt over a longer period, which could result in higher overall interest costs unless extra repayments are made. It’s also important to avoid accumulating new debt after refinancing, as this can lead to further financial strain.

When is the best time to refinance?

While refinancing can offer many benefits, timing is crucial. Consider refinancing when:

Interest rates have dropped significantly.
Your credit score has improved, making you eligible for better loan terms.
Your current loan has high fees or restrictive terms.
You need to consolidate debt to lower your overall repayments.
Your financial situation has changed, and you need a more flexible loan structure.

Steps to refinance your mortgage in Australia

1. Review your current mortgage: Start by assessing your existing home loan to understand its interest rate, loan term, fees, and any potential break costs or penalties.

2. Compare lenders and loan options: Shop around for the best refinancing options. Use comparison sites, mortgage brokers, and bank websites to compare interest rates, loan features, and fees.

3. Calculate the costs and savings: Refinancing isn’t free—there may be exit fees, application fees, valuation fees, and legal costs involved. Ensure that the savings from a lower interest rate outweigh these costs.

4. Check your credit score: Lenders will assess your credit score and financial history when determining loan eligibility. A higher credit score can help secure better rates.

5. Apply for the new mortgage: Once you’ve chosen a lender, submit a formal application with financial documents, proof of income, and property valuation reports.

6. Settle the new loan and close the old one: After approval, the new lender will pay off your existing mortgage, and your new loan agreement will take effect.

Common refinancing mistakes to avoid

Refinancing a mortgage can be a great way to reduce interest rates, lower monthly payments, or access home equity. However, many homeowners make costly mistakes that can outweigh the benefits. To ensure a smooth and financially sound refinancing process, avoid these common pitfalls:

1. Not considering all costs

Many borrowers focus solely on securing a lower interest rate, neglecting to factor in additional costs such as application fees, valuation fees, legal expenses, and early repayment penalties. While a lower rate can be appealing, it’s essential to calculate the total refinancing cost to determine whether the savings outweigh the expenses. Some lenders also charge break fees for exiting a fixed-rate loan early, which can be substantial. Always request a full breakdown of costs before proceeding with refinancing.

2. Extending the loan term too much

Lower monthly payments may seem like an advantage, but they often come at the cost of a longer loan term. Extending your mortgage by several years can lead to significantly higher interest payments over time. For example, refinancing a 20-year loan into a 30-year loan may reduce your immediate financial burden, but you could end up paying tens of thousands more in interest. Instead, consider maintaining your current loan duration or making extra repayments to offset the additional interest.

3. Ignoring loan features

Many borrowers focus only on interest rates and overlook valuable loan features that could save money in the long run. Consider whether the new mortgage offers benefits such as offset accounts, redraw facilities, or flexible repayment options. An offset account, for instance, reduces the interest you pay by linking a savings account to your mortgage balance. Similarly, the ability to make extra repayments without penalties can help you pay off your loan faster.

4. Not comparing enough lenders

Accepting the first refinancing offer without shopping around is a common mistake. Banks, credit unions, and non-bank lenders all have different products, rates, and fees. Even a small difference in interest rates can translate into significant savings over the life of the loan. Use mortgage comparison tools, consult a broker, and negotiate with lenders to secure the best possible deal.

5. Applying too often

Each refinancing application triggers a credit inquiry, which can lower your credit score if done excessively. Multiple applications in a short time frame can make you appear financially unstable to lenders, potentially reducing your chances of approval. Instead of applying blindly, conduct thorough research and get pre-approvals before submitting a formal application.

Best Refinancing Options in Australia

Some of the most competitive refinancing options are offered by:

Big Four Banks (Commonwealth Bank, Westpac, NAB, ANZ)
Online and Digital Banks (e.g., ING, UBank, Athena Home Loans)
Smaller Lenders and Credit Unions offering competitive rates and fewer fees

RateCity: Offers up-to-date information on refinancing rates and helps you calculate potential savings from switching loans.

Refinancing your mortgage in Australia can be a smart financial move if it reduces costs, improves loan flexibility, or aligns with your financial goals. However, it’s essential to consider all factors, compare lenders, and calculate the total savings before making a decision.

If you’re unsure, consulting a mortgage broker or financial adviser can help you determine whether refinancing is the best option for your situation.