The risks and benefits of refinancing your home loan

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Know the pros and cons of refinancing so you benefit from a good switch

Refinancing pros and consRegardless of whether you’re thinking about refinancing to get a better interest rate or as a way to consolidate your debts, refinancing can be quite costly and may end up costing you more in the long run, so it pays to be informed.

Refinancing won't suit every borrower, so by reading the list below you make the best decision when considering whether or not to make a switch.

The benefits of refinancing

  • Access equity. One of the benefits of refinancing is having the chance to access equity you’ve collected in your home loan. This can then be used for things like renovations, investing, purchasing a new car, taking a holiday, or any other pursuit you may be able to think of.
  • Get a better rate. Another benefit of refinancing your home loan is to get a better interest rate so your repayments will be lower. If you know you qualify for a low rate this could potentially save you a lot of money. This is one of the biggest benefits of refinancing.
  • Increase the length of your mortgage. This can reduce your repayments by spreading them out across a longer period of time. This may not be the best solution if you’re having trouble making payments. Try to seek the advice of a professional financial counsellor who can help you get out of your repayment rut, as over time you’ll spend a lot more in interest if you opt for this strategy.
  • Shorten the length of your mortgage. Refinancing can also do the opposite of the aforementioned benefit and shorten the length of your mortgage. This will lower the amount of money you spend on interest in the long run, but increases your repayments. This allows you to pay off the loan faster and gets you out of debt quicker.
  • Security. By choosing to refinance your home loan you may also be able to switch to a fixed rate loan. This will allow you to benefit from the protection of a locked interest rate which will stay the same for the entire life of the loan and protect you from fluctuations in the market. If you currently have a variable rate home loan refinancing to a fixed rate might benefit you.
  • Pay less in fees. Refinancing your home loan can also help lower the amount of money you spend on fees. Your current home loan may have built in fees for additional features like offset accounts or redraw accounts. If you refinance you might be able to drop these features or eliminate the fees for them.

The risks of refinancingRefinancing risks and benefits

  • Lenders Mortgage Insurance. One of the risks of refinancing your home loan is that you may need to pay Lender’s Mortgage Insurance (LMI) to your new lender, even if you’ve already paid it. This is usually only true if you have a loan-to-value ratio (LVR) that is above 80 percent, which basically means you have less than 20% equity in your property. LMI can be expensive, so this may undercut the savings you receive from refinancing.
  • Fees. There may also be exit fees that you’ll have to pay out of pocket, too. These are fees that you may be charged for exiting out of your loan early and if you have a fixed rate home loan, these can be quite high. There may also be upfront fees for your new loan as well. In addition to exit fees there are also upfront fees charged by your new lender, such as application fees and valuation fees.
  • Longer loan duration. Refinancing may also lock you into your home for longer than you planned on staying. If you had hopes of moving soon, refinancing your home loan could hurt your efforts. If you move too soon the monthly savings you gained may not have been worth the overall cost of refinancing.
  • If you have a bad credit rating you might not get a good rate. Refinancing your home loan can also hurt you if you have bad credit history. If your credit history is less than stellar you may end up with a higher rate when you refinance. This isn’t in your best interest and can hurt your bottom line. A poor credit history can give you a higher interest rate instead of the lower rate that you were hoping for.
  • It could damage your credit history. If you have poor credit history and continue making applications to refinance you could damage your credit file further. This is because every application for credit is recorded on your file. Too many applications in one space of time could lead to denied loan applications, which further damage your credit file. Before refinancing it’s always a good idea to get a copy of your credit file.
  • More features could equal more fees. A sometimes hidden risk in refinancing comes in additional features that a lender may offer. A lender is always looking for business so they may try to persuade you to refinance by offering you features like a free credit card or an offset account. While these may sound like benefits, they could come with additional fees or tempt you to spend more. If your current home loan doesn’t have additional features it also might not have the additional fees. This will mean that while you’re possible saving in interest, you’ll be paying more money in fees.

Compare refinancing home loans

% p.a.
Offset account
Split account
Loan type
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Interest Rate (p.a.) Comp Rate^ (p.a.) Rates (p.a) Application Fee Ongoing Fees Maximum Insured LVR Amount Saved
Newcastle Permanent Building Society Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier Special Rate, P&I)
Owner-occupiers can lock in a competitive rate with no ongoing fees. Conditions apply.
3.74% 4.85% Interest rate:

Comp rate:
$0 $0 p.a. 95% Go to site More info Essentials - Variable (Owner Occupier, P&I)
A basic home loan with a competitive rate and low fees.
3.64% 3.66% Interest rate:

Comp rate:
$0 $0 p.a. 80% Go to site More info
Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤85% ($150K+ Owner Occupier)
Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.
3.49% 4.47% Interest rate:

Comp rate:
$0 $375 p.a. 85% Go to site More info
UBank UHomeLoan Variable Rate - Standard Variable Rate Value Offer (Owner Occupier P&I)
Combine a low variable interest rate and free redraw with no application or ongoing fees.
3.74% 3.74% Interest rate:

Comp rate:
$0 $0 p.a. 80% Go to site More info
Reduce Home Loans Rate Buster 100% Offset Variable Home Loan - Up to $750k (LVR <=80%)
Borrow up to 80% LVR with no ongoing fees and a 100% offset account.
3.54% 3.54% Interest rate:

Comp rate:
$440 $0 p.a. 80% Enquire now More info Offset Variable - Up to 80% LVR (Owner Occupier P&I)
Take advantage of a 100% offset account along with no annual or application fees.
3.72% 3.74% Interest rate:

Comp rate:
$0 $0 p.a. 80% Go to site More info
IMB Budget Home Loan - Special LVR <=80% (Owner Occupier and Principal & Interest only)
A special limited time offer for owner occupiers. An IMB Transaction Account must be opened with this loan.
3.79% 3.84% Interest rate:

Comp rate:
$445 $0 p.a. 80% Go to site More info
Bank Australia Basic Home Loan - Variable (Owner Occupier)
A competitive variable rate that allows borrowers to borrow a minimum of $100,000 with a $0 ongoing fee.
3.86% 3.87% Interest rate:

Comp rate:
$0 $0 p.a. 80% Go to site More info
HSBC Home Value Loan - Resident Owner Occupier only
Enjoy a low variable rate with no ongoing fees and borrow up to 90% of the value of the property.
3.85% 3.86% Interest rate:

Comp rate:
$0 $0 p.a. 90% Go to site More info
NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier P&I) First Home Buyer Special
A special rate for first home buyers buying residential property and borrowing over $150K. 350K NAB Rewards Points offer available. Terms and conditions apply.
3.69% 4.86% Interest rate:

Comp rate:
$0 $395 p.a. 90% Go to site More info

How to minimise the risks of refinancing

While there are both risks and benefits to refinancing your home loan there are things you can do to minimise the risks to you and maximise the benefits. By studying the market you can see if refinancing will benefit you in terms of a lower interest rate. You should also research and compare home loans to make sure that they won’t cost you extra money in fees or to see if the savings will still outweigh the additional fees. You can also make sure you know your own credit history so you’ll know that you won’t get hit with a higher interest rate or higher closing costs due to poor credit.

If you have any concerns regarding refinancing your home loan it’s best to consult a mortgage broker or other financial advisor. Their expert advice can help you decide whether refinancing is the best option for you. You may also choose to use at-home tools like loan comparison calculators or refinancing fee calculators.

Top tips when refinancing

Refinancing risks and benefitsYou should shop around for home loans before deciding on one. Rates can vary dramatically from one financial institution to another as can additional fees and features. You should also read reviews of the lender in question or talk to friends or family who’ve used them so you know what to expect in terms of customer service.

Don’t get lured in by a lower interest rate. If you have a mortgage with one interest rate and realise that you can refinance for a slightly lower rate you may figure that refinancing is the best deal, but you have to take in all of the extra costs involved in the process. To get a good deal, figure out the exact numbers you’ll need to break even on the deal. This will allow you to actually save money instead of falling into a trap.

There are always expenses tied in with refinancing even when they’re advertised to have none. Some lenders may say that there are no closing costs with their service but there will still be out of pocket costs to you. Research these before entering into the loan.

You may want to research cash-in refinancing when shopping around. You may be able to swap your existing home loan for a smaller one. This option can allow you to bring money to the closing table which can increase your home equity if your property value decreased.

Consider speaking to your current lender before refinancing. Often just the thought of you leaving will entice them to offer you discounts on your rates or fees.

Refinancing your home loan can be a great way to save money. It can give you a lower interest rate, release equity from your home and help you get rid of fees attached to your original loan. There are both benefits and risks to refinancing and both should be researched carefully before any decisions are made.

Marc Terrano

A passionate publisher who loves to tell a story. Learning and teaching personal finance is his main lot at Talk to him to find out more about home loans.

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Bank Australia Basic Home Loan - Variable (Owner Occupier)

A competitive variable rate that allows borrowers to borrow a minimum of $100,000 with a $0 ongoing fee.

NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier P&I)

A fixed rate package with flexible repayment options. 350K NAB Rewards Points offer available. Terms and conditions apply.

Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤85% ($150K+ Owner Occupier)

Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.

IMB Budget Home Loan - LVR <=90% (Owner Occupier)

Get a competitive rate without features you may not use.

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2 Responses

  1. Default Gravatar
    tesJanuary 20, 2015

    which is better in terms of getting money from home loan..equity or topping up the loan..whats the benefits will it give me

    • Staff
      ShirleyJanuary 21, 2015Staff

      Hi Tes,

      Thanks for your question.

      The nature of this enquiry comes under financial advice as it takes into account your personal and financial situation. Please speak to your financial advisor or lender about the benefits that each option could give you.

      When applying for a top-up, your lender will take into account your current income and liabilities and possibly require an updated property valuation. For tapping into your equity, experts suggest that you think about the purpose of the funds and if it would enhance the value of the property.


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