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Does refinancing really save you money?

Mark Bristow avatar
Mark Bristow
- 5 min read
Does refinancing really save you money?

In a time when every dollar counts for household budgets, it’s no surprise so many Australians are looking to get a little breathing room from their mortgage repayments. But can refinancing your home loan really make a difference to an everyday household budget?

Refinancing reached a record high at the end of 2022, with the Australian Bureau of Statistics (ABS) Lending Indicators showing that $19.3 billion of housing was refinanced in November 2022. This was because thousands of Australians were looking to shave tens of thousands of dollars off their mortgages, and potentially cut down the years they’d be repaying their balance.

The loyalty tax – how to negotiate a rate cut

You’ve been with your bank for years, so they’ll definitely give you a good deal on your home loan, right?

Not necessarily. Banks are loyal – but to their shareholders, not their customers. That doesn’t mean they’ll give you bad service; many banks provide excellent service. But banks, like any other business, exist to make profits. So, you can’t assume they’ll automatically reward you for your loyalty.

If you want to get a better deal from your bank, you may need to take the initiative. You can call up your lender and try to negotiate a better deal – if they can’t or won’t offer you a lower rate or mortgage features and benefits that better suit your needs, then you may want to start thinking about refinancing.

Five ways refinancing could save you money:

How can refinancing help you pay off your home loan quicker?

You may have heard that refinancing your home loan to a cheaper rate can help you pay off your mortgage sooner. This can be true, but there are certain steps you need to follow to make sure this is the case:

  1. Always refinance to the same or shorter loan term: Some first time refinancers may fall for the trap of switching their loan to a longer loan term than they are currently on. While this will reduce their monthly repayment size, it will also increase the amount of interest they pay over the life of their loan.
  2. Use lower repayments to get ahead: With extra cash freed up each month by switching to a lower rate, you could shorten the life of your home loan. If, instead of pocketing the cash, you continue to make the same size repayments, you could reduce your mortgage principal faster, potentially knocking years and thousands of dollars in interest charges off your home loan.
  3. Take advantage of flexibility and features: If your current loan does not allow you to make weekly or fortnightly payments, you may be missing out on an opportunity to use more frequent repayments as a way of reducing the length of your loan. Similarly, if your current loan doesn’t allow you to make extra repayments whenever you wish, you could be missing out on an opportunity to pay off your loan quicker. By putting bonuses, inheritances, and gifts as lump sums towards your mortgage, you will be paying down the principal amount faster, which can mean paying less interest in the long run.

Common refinancing traps

Before you refinance your home loan to save money, keep in mind the following common refinancing traps:

  • Extending the life of your loan. Many homeowners make the mistake of extending their loan term when refinancing and getting stung by interest repayments over the long term. For example, you may only have 15 years left on your mortgage, but when you refinance, the lender may add another 20 to your loan term. This could mean lower repayments today, but you’ll be in debt for longer overall and may pay more in total interest charges, even if your rate is lower.
  • Fees. There will always be some costs involved with switching a home loan, such as discharge fees if you’re leaving a fixed-rate term early, application fees and more.
  • Packaged products. Are you on a package home loan? Don’t forget you may need to unbundle these packaged products, such as your credit card or an offset account, before you refinance your mortgage.

Why you might not want to refinance

Refinancing can be a smart move for some borrowers, but it’s not for everyone.

  • If you feel like you’re getting good service and good value from your mortgage lender, there might be no reason to go elsewhere.
  • If you’re concerned your interest rate is a bit high, you might be able to get it lowered just by calling your lender and threatening to take your business elsewhere if they don’t cut your rate.
  • If you’re near the end of your mortgage, any savings you might make by switching to a cheaper home loan might be outweighed by the time and money you need to invest in refinancing. 

The other point borrowers should consider is that while interest rates are important, they’re not the only thing you need to consider when comparing home loans. Other factors, such as fees, loan features and customer service, are also important.

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Product database updated 19 May, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.