If you haven’t reviewed your home loan interest rate for the past one or two years — or even longer — you may be quietly paying what is often referred to as a “loyalty tax” to your bank.
In the Australian mortgage market, banks often offer more competitive rates and incentives to attract new customers, while existing customers may find that their interest rate has gradually become less competitive compared with the current market.
So naturally, many homeowners ask:
“Should I refinance my home loan?”
But is refinancing really as simple as finding the bank with the lowest interest rate and switching?
How much lower does the rate need to be before refinancing is worthwhile? What costs should you watch out for? Could you end up paying LMI again? And if you don’t want to change banks, can you negotiate a lower rate with your existing lender?
Today, let’s take a practical look at refinancing and work through the numbers.
1. Why Consider Refinancing?
Refinancing isn’t necessarily just about getting a lower interest rate. For many borrowers, it is also an opportunity to review and improve their overall loan structure.
1. Lower Your Interest Rate and Avoid the “Loyalty Tax”
This is the most obvious benefit.
This can be particularly important when a fixed-rate loan expires and automatically rolls onto the lender’s standard variable rate. If you don’t proactively contact your bank and ask for a review, your new rate may be significantly higher than the rate available after negotiation.
Even a difference of 0.20%–0.30% can make a meaningful difference when you have a loan of several hundred thousand or even more than one million dollars.
For example:
$1 million Interest Only loan
Interest rate reduced from 6.70% to 6.40%
The annual interest saving would be approximately:
$1,000,000 × 0.30% = $3,000
That means you could save approximately $3,000 per year.
If the rate difference remains for five years, the total saving could reach approximately $15,000.
So if you haven’t reviewed your loan for one or two years, or your fixed-rate period is coming to an end, it is worth checking whether your current interest rate is still competitive.
2. Refinancing Is Not Just About Getting a Lower Rate
Many people think refinancing simply means:
Old bank → New bank → Lower interest rate.
But it can be much more than that.
A refinance can also be an opportunity to restructure your home loan.
Optimise Your Loan Structure
For example, you may be able to:
- Add an Offset Account
- Change from Interest Only to Principal & Interest
- Consolidate higher-interest debts such as credit cards, car loans and personal loans
- Adjust your loan term and repayment structure
- Restructure multiple loans to better manage your overall finances
For borrowers with multiple properties or more complex financial arrangements, this can be particularly important.
A good home loan solution isn’t necessarily the one with the lowest interest rate. It should strike the right balance between interest rate, loan structure, cash flow and your longer-term financial goals.
3. Your Property May Have Increased in Value — You Could Access Your Equity
If your property has increased significantly in value and you have also paid down some of your principal, your Equity may have increased.
Depending on your circumstances and the lender’s assessment, refinancing may allow you to access some of that equity for purposes such as:
- Home renovations
- Investment in another property
- Other investments
- Business funding
- Other legitimate financial needs
However, there is one important point to remember:
Equity is not free money.
Accessing equity means taking on additional debt and future repayment obligations. You should therefore consider your income, cash flow and overall borrowing capacity carefully before taking additional funds.
4. Before Refinancing, Don’t Look at the New Interest Rate Alone
If another bank offers a rate that is 0.30% lower, should you immediately refinance?
Not necessarily.
There are costs associated with refinancing.
1. Refinancing Can Involve Upfront Costs
For a variable-rate loan, you may potentially have costs such as:
- Discharge Fee
- Government Registration Fee
- Valuation Fee
- New loan-related fees
The actual costs depend on the lender and your individual circumstances.
If your loan is still within a fixed-rate period, you also need to pay particular attention to:
Break Costs
Breaking a fixed-rate loan early can sometimes cost several thousand dollars or even more.
So if you are currently on a fixed rate, don’t just compare the new interest rate. Make sure you check the potential Break Cost first.
2. Be Careful About Extending Your Loan Term
This is another issue that many borrowers overlook.
Imagine you currently have 15 years remaining on your home loan, but when you refinance, you reset the loan term back to 30 years.
Yes, your monthly repayments may become lower.
But at the same time:
You are now making repayments for twice as long.
As a result, the total interest you pay over the life of the loan could actually be higher.
So when assessing whether refinancing is worthwhile, don’t just ask:
“How much will my monthly repayment decrease?”
You should also ask:
“How much interest will I actually save over the remaining life of the loan?”
3. The New Bank May Not Approve Your Application
Refinancing is essentially a new loan application.
The new lender will reassess your:
- Income
- Household expenses
- Existing liabilities
- Credit history
- Property value
- Loan-to-Value Ratio (LVR)
- Borrowing Capacity
The lender will also generally apply an interest rate buffer when assessing your ability to service the loan.
So:
Just because you qualified for a particular loan several years ago doesn’t mean you will necessarily qualify for the same loan today.
This can be particularly relevant if you have recently experienced:
- Lower income
- Increased debts
- Higher credit card limits
- Increased household expenses
- Less stable self-employed income
In these circumstances, even if another bank offers a lower interest rate, you may not necessarily be able to successfully refinance.
5. Watch Out for the Possibility of Paying LMI Again
If your LVR is relatively high, you also need to consider LMI — Lenders Mortgage Insurance.
For example, if you previously paid LMI because of a high LVR, and you refinance to another lender while your LVR is still above that lender’s threshold, you may need to pay LMI again.
The LMI you previously paid to your existing lender generally won’t simply be refunded because you refinance elsewhere.
This can create a situation where:
Your new interest rate is 0.30% lower,
but you incur several thousand dollars or more in additional LMI.
In that case, refinancing may not necessarily be worthwhile.
6. How Much Lower Does the Interest Rate Need to Be?
Let’s look at a simple example.
Assume:
- Loan balance: $800,000
- Remaining term: 25 years
- Current interest rate: 6.25%
- New interest rate: 5.95%
- Rate reduction: 0.30%
- Refinancing costs: approximately $1,000
Under these assumptions, your monthly repayment could decrease by approximately $147.
That means your annual saving would be around:
$147 × 12 ≈ $1,764
If your refinancing costs are approximately $1,000, you could recover those costs in around:
7 months.
If the interest rate difference remains for the long term, the cumulative interest saving could be substantial.
Of course, the actual calculation will depend on your loan balance, remaining term, loan type, fees and future interest rate movements.
So don’t simply judge whether refinancing is worthwhile based on the interest rate difference alone.
The key question is:
How long will it take for your interest savings to recover the refinancing costs?
7. When Should You Review Your Home Loan?
If you fall into any of the following categories, it may be worth reviewing your loan sooner rather than later:
✅ Your current rate is 0.20%–0.30% or more above comparable market rates
✅ You haven’t asked your bank for a rate review in the past 1–2 years
✅ Your Fixed Rate is about to expire
✅ Your property has increased significantly in value and your LVR has fallen to 80%, or even below 70%
✅ You have stable income, a good credit history and sufficient borrowing capacity
In these situations, even if you ultimately decide not to refinance, it is still worth speaking with your existing lender and asking for a rate review.
8. When Should You Think Twice Before Refinancing?
You may want to carefully assess the situation before refinancing if:
❌ You are still within a fixed-rate period with a significant Break Cost
❌ You are planning to sell the property within the next 1–2 years
❌ Your current borrowing capacity is already tight
❌ You may need to pay a significant amount of LMI again
❌ The new lender offers a lower interest rate but charges higher annual or package fees
In other words:
A lower interest rate does not automatically mean refinancing is worthwhile.
9. You May Not Need to Change Banks to Get a Better Rate
This is something many borrowers don’t realise.
Being an existing customer of a bank doesn’t mean you simply have to accept your current interest rate.
You can:
Research the market → find competitive rates → then negotiate with your existing bank.
You can tell your lender:
“If you can’t offer me a better rate, I may consider refinancing to another lender.”
Many banks have Retention Offers designed to keep existing customers.
If you can achieve:
Stay with your existing bank + avoid a new loan application + avoid additional refinancing costs + reduce your interest rate
then that can obviously be the simplest and most cost-effective option.
So:
Before you refinance, it is often worth negotiating with your existing bank first.
10. Don’t Just Look at the Advertised Rate
Finally, when comparing home loans, don’t focus solely on the headline “lowest rate”.
You should also consider:
- Interest Rate
- Comparison Rate
- Annual / Package Fee
- Offset Account
- Redraw Facility
- Loan Features
- Loan Structure
- Your future funding requirements
- The lender’s lending policies
Because:
The lowest interest rate is not necessarily the most suitable home loan for you.
Final Thoughts: Is Refinancing Worth It?
There is no single answer that applies to everyone.
For two borrowers with the same $800,000 loan:
One borrower may save thousands of dollars a year by refinancing at a rate that is 0.30% lower, making the switch worthwhile.
Another borrower may have a significant Break Cost, additional LMI, refinancing fees or plans to sell the property soon, making refinancing less attractive.
So the key question isn’t simply:
“Which bank has the lowest interest rate?”
Instead, ask:
“How much can I actually save after all costs, how long will it take to recover those costs, and is the new loan structure better suited to my financial situation?”
If you haven’t reviewed your home loan for a long time, or your Fixed Rate is coming to an end, now may be a good time to take another look at your mortgage.
I’m Broker Alan.
If you’re unsure whether refinancing is worthwhile, start with four basic numbers:
Your current loan balance + current interest rate + remaining loan term + loan type.
From there, you can work out the potential savings, refinancing costs and break-even period before making a decision.
Refinancing is not the goal. The real goal is to make sure your home loan continues to suit your current financial situation while minimising unnecessary interest costs.