Compare the dollar outcome over a relevant timeframe, keep the remaining term deliberate and make sure the new structure solves the reason you are refinancing.
Start with the purpose
Refinancing may be intended to reduce interest, improve cashflow, change features, consolidate debt, access equity or prepare for another purchase. Each objective requires a different comparison.
If the purpose is unclear, a cash-back offer or small rate reduction can distract from a structure that does not fix the underlying issue.
Count every switching cost
Compare the benefit after all costs that apply to your situation, which may include:
- Discharge, settlement and government registration charges
- Application, valuation, package or annual fees
- Fixed-rate break costs
- Possible LMI where the new loan has a high LVR
- Costs associated with restructuring securities or loan splits
Do not quietly restart a 30-year loan
A refinance can lower the required monthly repayment simply by extending the debt over a new, longer term. That may help cashflow, but it can increase total interest and keep the debt in place for longer.
Compare the new loan using the remaining term on the current loan as well as any proposed extended term. If a longer term is chosen deliberately, understand the total cost and consider whether additional repayments are realistic.
Rate is only one part of cost
The comparison rate combines the interest rate with many fees for a standardised loan amount and term. It is useful for an initial comparison, but it may not reflect your exact balance, features, fixed-rate period or all costs.
Also compare offset functionality, redraw rules, extra repayment restrictions, package fees and what happens when any introductory or fixed rate ends.
Calculate the break-even point
Divide the net switching costs by the expected monthly saving to estimate how long it may take to recover the cost. Then ask whether you are likely to keep the loan for at least that long.
Before moving, ask the current lender whether it can improve the existing rate or product. Staying is not automatically best, but a genuine repricing may achieve part of the objective without a full refinance.
Check the structure survives the move
Refinancing can accidentally combine deductible and private debt, close useful loan splits or leave an offset linked incorrectly. Confirm the purpose, balance, repayment type, term and offset linkage for every new split before settlement.
If tax treatment is relevant, obtain advice from a registered tax adviser before changing the debt.
QUESTIONS WORTH ASKING
Before you commit
- What is the saving after every switching cost?
- How many months until the refinance breaks even?
- Is the loan term being extended?
- Are useful features being gained, retained or lost?
- Does every new split preserve the intended loan purpose?
SOURCES & FURTHER READING
This guide was cross-checked against the following Australian sources. External information and lender policies can change.
Moneysmart — Switching home loans ↗Moneysmart — Mortgage switching calculator ↗Moneysmart — Choosing a home loan ↗