What to Review Before Refinancing Your Home Loan

A lower advertised rate does not always mean a cheaper loan. Refinancing only pays when the true cost, including fees and the value of any lost features, is lower than what you are paying now.

Compare the rate you’re actually paying

Start with your current statement rather than the rate you signed up for. Introductory discounts expire. Fixed terms roll over and discounts can shrink without much notice.

Many borrowers compare that old headline number with a new advertised rate. This is where extra costs can be missed.

The comparison rate is a useful guide when shopping for mortgages. It combines the interest rate with most fees and charges into a single percentage, making it easier to compare loans with different fee structures.

However, published comparison rates are calculated using a standard representative loan amount and term. They may not reflect the cost of your actual balance, preferred term or repayment structure.

Do not assume a lower variable rate will beat a fixed option. A fixed loan with a slightly higher rate but low fees may cost less over two years than a sharp variable rate carrying annual and settlement charges. This mismatch is easy to overlook when borrowers focus on headlines and skip the fee pages.

Value the property honestly and do the LVR math

Your equity helps determine which rate tier you may access. Lenders assess risk partly through the loan-to-value ratio, which is your loan balance divided by the lender’s valuation.

Online estimates do not set that value. The lender’s valuation does, and it may come in below what you had hoped, particularly if recent sales in your area were soft.

Do not guess this number.

Run the maths before you apply. If you owe $400,000 against a $500,000 valuation, your LVR is 80%, placing you on the edge of pricing tiers that may offer better rates.

An LVR below 80% will often provide access to sharper pricing and may avoid lender’s mortgage insurance. Above that level, you may face a higher rate and could pay mortgage insurance on the new loan, even if you paid it previously.

If property values have risen since you bought, you may hold more equity than expected. That additional equity can lower your LVR without you paying down much principal, so a fresh valuation can sometimes change the refinancing decision.

Total the exit costs and find the break-even month

If you are still on a fixed rate, contact your current lender first. The break cost for leaving early may be the largest refinancing expense, and it can change with market rates.

Add the discharge fee for releasing your current loan and any setup charges on the new one. Many borrowers ask a mortgage broker at https://adafinancialservices.com.au to compare lenders and negotiate on their behalf once those figures are clear.

Then divide the total switching cost by the expected monthly saving. As an illustrative example, if costs are $2,000 and you save $200 a month, you break even in ten months.

If you plan to sell or refinance again before reaching that point, you will not recoup the outlay. Treat any cashback as a reduction in switching costs rather than the main reason to change loans.

Get every cost in writing before committing. Discharge fees and settlement charges may seem small individually, but they add up quickly. For example, a $350 discharge fee plus $600 in setup charges would take about eight months to recover if the monthly saving were $120. That timeline may work if you expect to hold the loan for years. It is less appealing if you plan to move soon.

Keep the features you actually use

The rate is only one part of the loan. If you maintain a large balance in an offset account, losing that feature could wipe out the benefit of a slightly lower rate.

Check the redraw conditions as well. Some low-rate loans limit how you can re-access extra repayments or charge for withdrawals, which may not suit borrowers who make additional payments and later need those funds back.

List the two features you use most. Borrowers who value an offset account and flexible repayments may reasonably keep a slightly higher-rate loan when the interest saved through the offset outweighs the headline difference.

Avoid paying for extras you are unlikely to use. If you never fix your rate or use a package card, a basic variable loan with redraw may be a better fit and cost less to maintain.

Check your borrowing position and loan term

Refinancing involves a full application. The new lender will check your credit file and apply its own serviceability assessment. It will also verify income and living costs again, even if your balance is not increasing.

A credit enquiry may affect your score and will generally be recorded on your credit file. Limit unnecessary applications and assess likely eligibility before applying to multiple lenders.

Choose the loan term carefully before signing. Many refinances reset the term to 30 years, reducing the monthly repayment while extending the period over which interest is charged.

If you have already paid down five years, consider asking to keep the remaining term. Your repayment may not fall as much, but you can preserve more of the long-term interest saving that prompted the refinance.

Compare the true costs and make sure you will pass the break-even point. Keep a term and the features that suit the way you actually repay.