Mortgage Refinancing Explained

Refinancing a mortgage means replacing your existing home loan with a new one, either with your current lender or a different one. People refinance for many reasons: to secure a lower interest rate, access equity, change loan features, or consolidate debt. Done at the right time and with the right preparation, refinancing can save substantial amounts over the remaining life of a loan. Done poorly, it can cost more than it saves.

Why People Refinance

To get a lower interest rate: This is the most common reason. If rates have fallen since you took out your loan, or if your credit position has improved, you may be able to access a lower rate elsewhere.

To access home equity: If your property has increased in value, you may be able to refinance to a higher loan amount and access the difference as cash for renovations, investment, or other purposes.

To change loan features: Adding an offset account, switching from interest-only to principal and interest, or moving from a fixed rate that is expiring to a variable rate are all reasons to refinance.

To consolidate other debts: Rolling high-rate personal loans or credit cards into a lower-rate mortgage can reduce monthly repayments, though it extends the repayment period and increases total interest paid unless you make extra repayments.

Costs of Refinancing

Refinancing is not free. Common costs include discharge fees from your existing lender (charged to close your current loan), application or establishment fees on the new loan, property valuation fees, government registration fees, and break costs if you are exiting a fixed rate loan early. These costs must be weighed against the interest savings to determine whether refinancing is worth it.

Calculating the Break-Even Point

The break-even point is how long it takes for your interest savings to exceed the costs of refinancing. If refinancing costs you $3,000 and saves you $100 per month in repayments, your break-even is 30 months. If you plan to stay in the property for at least that long, refinancing is likely worthwhile. If you plan to sell or refinance again before break-even, it probably is not.

The Refinancing Process

The process is similar to applying for a new mortgage. You will need to provide current income documentation, a current mortgage statement, and evidence of the property's value. The new lender will assess your serviceability at a stressed rate as with an initial application. If approved, the new lender pays out your existing loan and takes over the mortgage. Settlement typically takes two to four weeks.

When Refinancing May Not Make Sense

Refinancing is less likely to benefit you if you are well into your loan term (most of the interest has already been paid), the cost savings are small relative to the fees involved, you are in a fixed rate period with significant break costs, your financial position has deteriorated and you may not qualify for a better rate, or you plan to sell the property within the next few years.

Key Takeaway

Refinancing can deliver meaningful savings, but only when the interest rate reduction is large enough to justify the costs and you plan to stay in the loan long enough to reach the break-even point. Calculate your break-even before proceeding, and factor in all costs, not just the interest rate difference.