When Does Refinancing Actually Make Sense? (And When It Doesn't)

Refinancing is one of those things that sounds straightforward but isn't always. Done well, it can save you tens of thousands. Done poorly — or done at the wrong time — it can cost you more than you save. Here's how to think through it properly.

What Refinancing Actually Involves

Refinancing means replacing your existing home loan with a new one — either with your current lender or a different one. You're not paying off your loan; you're restructuring it.

People refinance for different reasons:

• To get a lower interest rate

• To access equity in their property

• To change their loan structure (e.g. switching from fixed to variable, or adding an offset account)

• To consolidate other debts

• To improve their loan features — redraw, offset, flexibility on repayments

The most common motivation is chasing a better rate. That's a good reason to refinance — but only if the numbers actually stack up once you factor in the costs.

The Break-Even Calculation — The Only Number That Matters

Before refinancing, you need to know your break-even point: how long it takes for your monthly savings to cover the cost of switching.

Every refinance has costs. These might include:

• Discharge fees from your current lender ($150–$400 typically)

• Break costs if you're exiting a fixed rate loan (can be substantial — potentially thousands)

• Application or establishment fees with the new lender ($0–$700)

• Valuation fees ($0–$500, though many lenders waive this)

• Legal/settlement fees ($200–$400)

Total switching costs of $1,500–$3,000 are common for a variable rate refinance. Fixed rate break costs can push this significantly higher.

The break-even formula is simple: total costs ÷ monthly saving = months to break even.

If your costs are $3,000 and you save $200 per month, you break even in 15 months. If you're planning to sell or refinance again within 12 months, you haven't saved anything.

The Rate Difference That Actually Matters

Not all rate differences are worth chasing. A 0.05% improvement on a $400,000 loan saves you about $17 per month. After switching costs, you'd need to stay in the loan for years before you're better off.

As a rough guide:

Rate difference	Monthly saving ($500k loan)	Break-even ($3k costs)
0.10%	~$42/mo	~6 years
0.25%	~$104/mo	~29 months
0.50%	~$208/mo	~14 months
1.00%	~$416/mo	~7 months

A 0.50% or greater rate improvement is generally where refinancing starts to clearly make sense — assuming you plan to stay in the loan long enough to capture the benefit.

The "Loyalty Tax" — Why Your Current Rate Might Already Be Too High

Australian lenders have a well-documented habit of offering their best rates to new customers and quietly leaving existing customers on higher rates. This is sometimes called the loyalty tax.

The Reserve Bank and ACCC have both highlighted this issue. Research has consistently shown that borrowers who haven't reviewed their rate in the past two years are typically paying 0.30%–0.70% more than they need to be.

"You don't have to change lenders to get a better rate. Sometimes the most effective step is asking your current lender to match what's available in the market. They'd often rather give you a discount than lose you."

When Refinancing Makes Sense

• Your rate is 0.50% or more above what's available in the market

• Your fixed rate term is ending and you haven't reviewed your options

• You haven't reviewed your loan in more than 2 years

• Your property has increased in value and you're now below 80% LVR — opening up better rate options

• You want to access equity for renovation, investment or other purposes

• Your loan features no longer suit your situation (e.g. you want an offset account you currently don't have)

  
  

When Refinancing Probably Doesn't Make Sense

• You're on a fixed rate with significant break costs and the saving doesn't overcome them

• You're planning to sell within 12–18 months

• Your financial situation has changed (reduced income, new debts) and you may not qualify for the same borrowing capacity

• The rate difference is under 0.25% and switching costs are typical

• You've recently refinanced and are still within the break-even window

Don't Forget About Features

Rate is important, but it's not everything. A loan that's 0.10% cheaper but has no offset account might cost you more in real terms if you maintain a significant offset balance. Redraw limits, repayment flexibility and portability all matter depending on your situation.

The cheapest rate on paper isn't always the cheapest loan in practice.

General information only. Break costs, fees and potential savings vary significantly by lender and individual loan circumstances. Rate comparisons and break-even figures are illustrative only. Always obtain a detailed comparison before making refinancing decisions. Credit Representative Number 439731.

Not sure if refinancing stacks up for you?

I can review your current rate against what's available in the market and run the break-even numbers — at no cost and no obligation.