Refinancing a First Home Loan: Pros and Cons

Refinancing your first home loan can lower your repayments, but only if the savings are bigger than the cost of switching.

Some first home buyers may not review their loan after settlement. That is understandable. But a loan that suited you on day one may not suit you now. This article walks through the real upsides and downsides so you can decide whether a switch is worth your time.

Why Refinance a First Home Loan?

The main reason to refinance is to move to a lower interest rate or to get features that suit your life more closely. A lower rate means less of each repayment goes to the lender.

Other common reasons include adding an offset account or redraw facility, moving off a fixed rate that is ending, or setting up a loan that suits a changing budget. If your fixed term is close to finishing, our fixed rate expiry page explains your options. A loan health check is a good way to see how your current loan compares before you decide anything.

The Pros: What You Can Gain From Refinancing

The gains from refinancing are lower interest costs, improved cashflow, and loan features that match how you live. Whether you actually get those gains depends on your deposit size, your lender and your circumstances.

Small rate differences add up over time. As an illustration only, take a loan balance of $500,000 over 25 years at an example rate of 6.75% p.a. Principal and interest repayments would be about $3,455 a month. If the rate fell by 0.5 percentage points to 6.25%, repayments would be about $3,298 a month. That is a difference of roughly $157 a month. These figures are illustrative and use an example rate, not a current offer.

You might also gain an offset account, which can reduce the interest you pay by sitting against your loan balance. The trade-off is that loans with offset accounts sometimes carry a higher rate or an annual fee, so the feature needs to be something you will actually use.

The Cons: What Refinancing Can Cost You

Refinancing has upfront costs, and those costs can cancel out your savings if the rate gap is small. Common costs include a discharge fee on your old loan, an application fee on the new one, and a break fee if you leave a fixed rate early.

Exit fees on most home loans signed since 1 July 2011 are banned. However, break fees on fixed loans and discharge fees are not covered by that ban. Fees vary by lender, so ask for the exact figures before you commit.

If you have less than 20 per cent equity, you may have to pay lenders mortgage insurance again on a new loan. That can wipe out any saving from a lower rate. A new lender will also reassess your income, debts and spending, so a change in your circumstances could affect the result.

There is one more catch. If you restart a 30 year term to lower your repayments, you will usually pay more interest over the life of the loan, even though each month feels lighter.

When Is the Right Time to Refinance a First Home Loan?

The right time is when the savings from a new loan clearly exceed the total cost of switching. Common triggers are a fixed rate ending, a rate gap with other lenders, or a change in your income or goals.

Brokers also have a legal duty here. Under the law, a mortgage broker must act in your interests when recommending a loan. That includes telling you to stay put when switching would not save you money after fees are counted.

As an example, consider a Collingwood Park first home buyer with a loan of $450,000 and a fixed rate that is about to end. The lender's revert rate is well above what other lenders are offering, and their equity is above 20 per cent. A broker compares the options and finds a lender with a lower variable rate. The switching costs total about $900 in discharge and application fees. At the 6.75% p.a. example rate, repayments on the old loan over 25 years would be about $3,109 a month. If the new rate were 6.25% p.a., repayments would be about $2,968 a month, a saving of roughly $141 a month. Costs of $900 would be recovered in around six and a half months. These numbers are illustrative only. The buyer switches, sets up an offset account for their savings, and keeps the new term at 25 years so the loan is not stretched out.

Refinancing If You Used the 5% Deposit Scheme

If you bought with the Australian Government 5% Deposit Scheme, you may be able to refinance to another participating lender and keep the scheme benefit. You cannot increase the loan amount or extend the term.

Refinancing with a lender that does not take part in the scheme counts as repaying the loan in full, and you lose the benefit. If your loan-to-value ratio is above 80 per cent at that point, the new lender may charge lenders mortgage insurance or other costs. The trade-off is that your choice of lenders is smaller, so the rate you can reach may be narrower. Check your scheme conditions before you apply.

How Does the Refinance Process Work?

The refinance process starts with a review of your current loan and ends with your new lender paying out the old one. Your broker gathers your details, compares lenders, submits the application and arranges the discharge.

Your new lender will assess your income, expenses and repayment history, and will usually value the property. Once approved, you sign the new loan documents and the lenders settle between themselves. Timeframes vary by lender. If you want to find out how much a new lender might offer, our borrowing capacity page is a useful starting point, and you can read more about our refinancing service.

Many owners in Collingwood Park may have built some equity since buying. Equity can help your case, but a lender's valuation is what counts.

Frequently Asked Questions