Common Mistakes and Benefits of Refinancing a Home Loan

Refinancing can lower your repayments, but only when the savings are bigger than the costs of switching. A busy work schedule can make a loan review easy to put off. A short check of your loan can show whether you are paying more than you need to.

What Are the Benefits of Refinancing a Home Loan?

The main benefits of a refinance are a lower interest rate, lower repayments, and loan features that suit your life better. Some borrowers also use a refinance to release equity or to consolidate other debts into the mortgage.

A lower rate is the most common reason. If your lender has not passed on changes or you have been on the same loan for years, a different lender may offer a lower rate depending on your deposit size and equity. Features matter too. An offset account can reduce the interest charged on your balance, and a redraw facility lets you access extra repayments you have made. Both can improve cashflow if you use them well, but some lenders charge a higher rate or an annual fee for packages that include them.

If you want to compare your options, our page on home loan refinancing for pharmacists explains how we approach it.

Mistake One: Refinancing Without Counting the Switching Costs

A refinance only makes sense when the total savings are higher than the total costs of switching. Costs can 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 charged on ending a home loan secured by residential property are prohibited for contracts signed on or after 1 July 2011. That prohibition does not cover break fees on fixed loans or discharge fees. If you have less than 20 per cent equity, you might also face lenders mortgage insurance on the new loan. Ask each lender for a full list of costs before you apply.

The rules also apply to us. A broker must act in your interests, and that can include advising you to stay where you are if switching would cost more than it saves.

Coming Off a Fixed Rate: When Should You Refinance?

The best time to look at a refinance is a few weeks before your fixed rate period ends, because you avoid a break fee and can choose between lenders on your own timeline. A break fee only applies if you end a fixed loan early.

When the term ends, your loan usually rolls onto the lender's variable rate. That rate might be higher than what is available elsewhere. You can read more about this on our fixed rate expiry page. The trade-off is that a variable rate can rise or fall, while a new fixed rate gives repayment certainty but may limit extra repayments and carry a break fee if you leave early.

Example: Switching From a Rolled-Over Variable Rate

Consider an aged care pharmacist whose fixed term has just ended and whose loan is now on a higher variable rate. Their balance is $600,000 with 25 years left. At the illustrative rate of 6.75% p.a., principal and interest repayments are about $4,145 a month.

Suppose a new lender offers a rate 0.50 percentage points lower, at 6.25% p.a. over the same 25 years. Repayments drop to about $3,958 a month, which is roughly $187 less each month. Over a year that is around $2,240.

The pharmacist then adds up the costs. A discharge fee, an application fee and a property valuation come to a total that the lender confirms in writing. If those costs are a few hundred dollars, the saving covers them within a few months. If they were several thousand, it would take much longer. In this scenario the costs are modest, so the pharmacist switches and keeps the repayments the same as before. That pays the loan down faster instead of stretching it out. These figures are illustrative only. Your rate, balance and costs will differ, so use a repayment calculator with your own numbers.

Mistake Two: Stretching the Loan Term to Cut Repayments

A refinance that lowers repayments only because the loan term is longer will usually cost you more interest overall. Regulators expect lenders and brokers to point this out to borrowers.

If cashflow is tight after a roster change or reduced hours, a longer term can help. The cost is more interest over the life of the loan. Where you can, keep the original term, or keep paying the old repayment amount so the extra goes against your balance.

Can You Release Equity When You Refinance?

Yes, many lenders let you borrow against the equity in your home when you refinance, subject to a property valuation and their credit assessment. Adding to your debt is a different thing from a like-for-like switch, so lenders look at it more closely.

Release equity only for a clear purpose, such as a renovation or a deposit on your next property. The cost is a bigger loan and higher repayments. See our equity release loans for pharmacists page for more detail.

Tax matters here. If you use borrowed money for private purposes, the interest on that part is generally not deductible, even if an investment property secures the loan. Mixing private and investment borrowing in one loan can also make record-keeping harder. Talk to your accountant before you set up the loan structure.

Mistake Three: Forgetting Scheme Loans Have Special Rules

If your loan sits under the Australian Government 5% Deposit Scheme or Help to Buy, refinancing can change your benefits. Check the conditions before you apply.

Under the 5% Deposit Scheme, you may be able to refinance to another participating lender and keep the benefit, but you cannot increase the loan or extend the term. Moving to a lender outside the scheme counts as repaying the loan, and you can lose the benefit. That can bring lenders mortgage insurance back if your loan is still above 80 per cent of the property value. Help to Buy has its own approval steps. Our Help to Buy scheme page covers the basics.

Will Lenders Reassess You When You Switch?

Yes. A new lender will assess your income, expenses and debts again, and it must check that the loan suits your needs. Your repayment history on the old loan is a key part of that check.

If you only want a lower rate and are not borrowing more, the process is often more straightforward because lenders can focus on how you have kept up with repayments. If you are borrowing more, expect closer scrutiny. Lenders also test your ability to repay at a rate well above the loan rate, so a switch can be declined even if you are meeting repayments today. Some lenders can approve exceptions, and these are decided case by case.

If you have a loan with extras like offset, a short loan health check is a low-effort way to see where you stand before you apply.

If your fixed term is ending, your loan has not been reviewed for a while, or you want to access equity, call one of our team or book an appointment at a time that works for you. We understand aged care pharmacy rosters, so we can fit around them.

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