Your Interest Rate Isn’t the Whole Story: 5 Things to Compare Before Refinancing

When people start thinking about refinancing, the first question is usually: What interest rate can I get?

That is an important question—but it is not the only one.

A lower rate can reduce your repayments and the interest charged over time. However, a home loan is more than a percentage on a screen. Fees, loan term, features, structure and flexibility can all affect whether a refinance genuinely leaves you better off.

Before changing lenders, it helps to compare the whole loan rather than focusing only on the advertised rate.

1. The interest rate—and the comparison rate

Start with the actual interest rate that would apply to your loan, not simply the lowest rate shown in an advertisement.

The rate available to you can depend on factors such as:

• whether the property is owner-occupied or an investment; • principal-and-interest or interest-only repayments; • your loan-to-value ratio; • the loan amount; • the product and features selected; and • the lender’s assessment of your application.

It is also worth checking the comparison rate. A comparison rate combines the interest rate with most fees and charges into a single percentage, which can make it easier to compare the cost of different products.

However, a comparison rate is still only a guide. It is calculated using a prescribed example loan amount and term, which may be different from your actual loan. It also does not capture every feature or condition that might matter to you.

The useful question is not simply, “Which loan has the lowest advertised rate?” It is, “What will this loan cost and how will it work for my circumstances?”

2. The cost of changing loans

Refinancing is not always free. Depending on your current loan and the new lender, possible costs may include:

• discharge or termination fees; • application or establishment fees; • valuation fees; • settlement or legal fees; • package or annual fees; • government registration charges; and • fixed-rate break costs, where applicable.

If you have less than 20% equity, lenders mortgage insurance may also apply with the new lender. LMI generally protects the lender rather than the borrower, and paying it again can significantly change the value of refinancing.

Some lenders offer cashback or refinance incentives, but these should be considered alongside the complete cost and suitability of the loan. An incentive can look attractive upfront while a higher rate, ongoing fee or unsuitable structure costs more over time.

Once the costs are clear, calculate the break-even period: how long will the monthly saving take to recover the cost of switching?

For example, if refinancing costs $1,200 and reduces repayments by $100 per month, the simple break-even period would be about 12 months. That does not automatically make the refinance suitable, but it gives you a clearer way to assess the benefit.

3. The new loan term

A refinance can reduce the monthly repayment simply because the debt has been stretched over a longer period.

Imagine you have 22 years remaining on your current loan and refinance into a new 30-year term. The repayment may fall, but you could remain in debt for eight additional years and pay more interest overall—even with a lower rate.

That does not mean restarting the term is always wrong. Some borrowers deliberately prioritise cash flow, while others keep the remaining term similar or continue making their previous repayment amount after refinancing.

The important thing is to understand where the repayment reduction comes from. Compare:

• the proposed monthly repayment; • the remaining term; • the total interest payable over that term; and • the effect of making additional repayments.

A lower repayment today is useful, but it should be viewed alongside the longer-term cost.

4. The features and loan structure

The cheapest-looking loan may not be the most useful loan.

Features such as an offset account, redraw facility, additional repayments, split lending and the ability to fix part of the loan can affect how well the product fits the way you manage money.

An offset account may help reduce the interest charged while keeping funds accessible. But an offset product may also come with a higher interest rate or package fee, so the likely interest saving should be compared with its cost.

Redraw can also be useful, but access rules may differ between lenders and products. Offset and redraw are not the same, and the distinction may be particularly important if the property could later become an investment. Tax outcomes depend on individual circumstances, so obtain tax advice where appropriate.

Loan structure matters too. If you have several loan splits, an investment property, future renovation plans or a need to keep personal and investment borrowing separate, a single headline rate does not tell the full story.

The right features are the ones you are likely to use—not simply the product with the longest feature list.

5. Flexibility, policy and what happens next

A refinance should suit both your current position and your likely plans.

Before choosing a product, consider questions such as:

• Can you make additional repayments without restrictions or fees? • Can you access funds when needed, and under what conditions? • What happens when an introductory or fixed rate ends? • Can the loan be split, restructured or switched later? • Will the lender’s policies suit your income type and future borrowing plans? • How responsive is the lender when you need support or make changes?

The lender offering the lowest rate today may not be the lender that best supports what you want to do next. That could include renovating, buying an investment property, changing employment, reducing debt faster or simply keeping your finances easy to manage.

It is also important to remember that refinancing requires a new application. Approval is not guaranteed, and changing employment, living expenses, credit limits, property value or lending policies can affect the outcome.

Before refinancing, compare the outcome—not just the rate

A good refinance comparison should answer four practical questions:

1. What will it cost to leave the existing loan and establish the new one? 2. How long will it take to recover those costs? 3. What will the loan cost over the intended term? 4. Does the structure support how you use your money and what you want to do next?

Sometimes refinancing is clearly worthwhile. Sometimes negotiating with the existing lender may be enough. In other cases, the current loan may remain appropriate once the switching costs and features are properly compared.

The goal is not to change lenders for the sake of it. It is to make an informed decision based on the overall outcome.

Thinking about refinancing? Axiom Financial can review your current loan, compare the costs, structure and features, and explain your options in plain English. Get in touch to arrange a home-loan review.

General information disclaimer

This information is general in nature and does not take into account your objectives, financial situation or needs. It is not financial, legal or tax advice. Lending criteria, fees, rates and terms apply and can change. Before acting, consider whether the information is appropriate for your circumstances and seek relevant professional advice where required.

Sources

Moneysmart — Switching home loans: https://moneysmart.gov.au/home-loans/switching-home-loans Moneysmart — Choosing a home loan: https://moneysmart.gov.au/home-loans/choosing-a-home-loan Moneysmart — Fixed vs variable home loan interest rates: https://moneysmart.gov.au/home-loans/fixed-vs-variable-home-loan-interest-rates Moneysmart — Mortgage offset accounts: https://moneysmart.gov.au/home-loans/mortgage-offset-accounts ASIC — National Credit Code: comparison rates: https://www.asic.gov.au/regulatory-resources/credit/credit-general-conduct-obligations/national-credit-code