What Are the Pros and Cons of Refinancing?

Refinancing is the process of switching from your existing home loan to another. While homeowners sometimes refinance with their existing lender, as they might be able to negotiate lower interest rates or add certain features to the loan, they’ll more commonly look for options with other lenders.  

Unfortunately, the ‘loyalty tax’ – prospective or new borrowers getting a better deal than existing ones – is alive and well. So if you think your current home loan interest rate may no longer be competitive, then it could be time to shop around and consider refinancing.    

Of course, switching to a new home loan (or lender) comes with both perks and pitfalls. Let’s take a look at both sides of the coin. 

Advantages	Disadvantages
Secure lower interest rates	Pay fees to both your existing and new lender
Adjust your loan term	Make higher repayments
Access your home equity	Can be charged lenders mortgage insurance
Switch to a fixed rate loan	See your home equity go down

What are the benefits of refinancing? 

1. You could secure a lower interest rate 

One of the main perks of refinancing is the chance to snag a lower interest rate.  

The last few years have seen a lot of change when it comes to interest rates.  If you’ve had your mortgage for a while, there is a possibility your rate may no longer be competitive. Refinancing to a loan with a lower rate means you could reduce your monthly repayments by a few hundred bucks less. And it’ll save on total interest payments throughout the life of your loan. 

Plus, if you keep your monthly repayments the same (meaning you’re actually paying more than the minimum repayment) then you could pay off your loan a lot sooner.  

2. You can adjust your loan term and features 

If you’re at a point in your life where you’re bringing in more money than you used to, then you could consider refinancing to a loan with a shorter term.  

Remember, you don’t have to wait for the entire life of your loan (typically 20 to 30 years) to pay it all off. If you have the means to make higher monthly repayments, then you can choose to shorten it and be mortgage-free much sooner. 

Helpful tip:

Refinancing to a different home loan type or lender might also give you access to new features that your previous loan didn’t have, such as an offset account or redraw facility.

Debbie Shankar

Former Group Content Manager, Lendi

3. You can access home equity 

When you refinance, you get the chance to free up the equity in your current property, especially if you’ve owned it for a long time. Cash out refinancing could give you the funds to purchase a second property or renovate your home. 

‘My partner and I opted for cash out refinancing a few years after we’d bought our first property to help us buy our second. We took the time to assess our financial situation under the guidance of a mortgage broker, while carefully evaluating different home loan options for a second property.  We eventually took the plunge and ‘cashed out’ the equity from our first home to beef up the deposit for our new investment property.

While it was pretty cool to leverage cash out refinancing for a second property, it’s important to acknowledge that this move also bumped up our debt load and overall monthly repayments!’

Tina Sendin
Digital Writer, iSelect

4. You can switch to a fixed-rate home loan 

Different types of interest rates suit different circumstances. Refinancing gives you the option of changing your loan type.  

For instance, the interest on a fixed-rate home loan will stay the same over the fixed term period of your loan (usually from one to five years). But a variable rate home loan can allow you to make unlimited extra repayments, which could help you pay it off faster and save on interest. 

Now say you’re currently on a variable-rate home loan. If either (1) the ups-and-downs in monthly repayments (aka interest rate volatility) are doing a number on your mental health or (2) market projections tell you interest rates are likely to stay low for a few years, then refinancing can help get the peace of mind that comes from a fixed interest rate. 

What are the disadvantages of refinancing? 

1. You usually need to pay fees 

Refinancing your home loan can come with its own costs. It would make sense to compare the cost of switching loans against the cost of staying with your current lender.  

• Break fees
  These are costs to pay for leaving your home loan a tad too early. Typically applied to fixed interest home loans, break fees are charged by your lender to cover any potential losses because of your early exit. 
• Discharge fees
  A common fee charged when you close your home loan. This differs from break fees as they’re charged regardless of whether you have a variable or fixed home loan.
• Sign up or application fees
  When you refinance, you’re also applying for a new home loan. This one-off, up-front fee can set you back a few hundred to a thousand, depending on your lender and the amount of the new loan.
• Valuation fees
  As part of the refinancing process, the new lender would likely want to assess the value of the property (and your equity). You may be charged a fee to cover this, but some lenders also tuck this into the application fees. 

2. You might end up with higher repayments 

It’s important to keep in mind that cashing out your equity will likely make your repayments go up. Similarly, shortening your loan term will increase your repayments because you’re paying off the same debt in a much shorter period. 

That’s why before signing off on anything, it’s a good idea to make sure your budget can realistically cover your new – and potentially much higher – repayments. 

3. You could be charged LMI 

Lenders mortgage insurance (LMI) is the lender’s safety net in case the borrower gets into a difficult financial situation and is suddenly unable to pay their mortgage.  

LMI typically applies if you have less than 20% equity in your property, and you’ll have to pay this amount up-front if you switch lenders. 

4. You might erode your home equity 

You’ve worked hard for your home equity and if you cash it out, you’ll not only reduce how much you could borrow from a new lender; it may also impact the interest rate offered to you. 

For instance, if you have $120,000 worth of equity and you cash out $50,000 for home renos, you’ll be left with $70,000 in your equity. Less equity likely means a less competitive interest rate. 

This is due to the loan-to-value ratio (LVR), which is the loan amount divided by the property value. The lower the LVR, the better. Having a LVR of 60% or less means you’ll likely be offered a lower interest rate because you are seen as lower risk of defaulting. 

How do I know if refinancing is the right choice for me? 

There are many factors to consider before you can answer this question confidently. To help illustrate the importance of weighing up the pros and cons, we’ve come up with the following fictional examples.  

Meet Alice and Bob who have both used this questionnaire to help them decide whether refinancing is for them: 

Where can I find and compare home loans? 

If you’re contemplating the idea of refinancing, it’s worth taking the time to explore different home loan options available in the market. iSelect and Lendi have teamed up to make your life easier. Find and compare home loans from our range of lenders online.