How to Refinance Your Home Loan: A Step-by-Step Guide to Saving Thousands

When Refinancing Makes Sense

Not every rate drop means you should refinance. But there are a few clear signals that it is worth looking into.

• Your current rate is 0.50% or more above what new borrowers are getting. That gap alone can save you thousands each year on a typical loan.
• Your fixed rate term is about to expire. When a fixed period ends, your loan usually reverts to a much higher rate. This is the perfect time to shop around.
• Your property has grown in value. More equity means a lower loan-to-value ratio (LVR). A lower LVR unlocks better rates because you are less risky to lenders.
• Your income has increased since you first borrowed. A stronger financial position means you qualify for more competitive products.
• You want features your current loan does not offer. An offset account, a redraw facility, or the ability to make unlimited extra repayments can all save you money.

When NOT to Refinance

Refinancing is not always the right move. Sometimes the costs outweigh the savings.

• Your remaining loan balance is small. If you owe less than $150,000, the interest savings from a lower rate may not cover the costs of switching.
• You are on a fixed rate with high break costs. Ask your lender for a break cost estimate before you go any further. On large loans with years remaining, these costs can run into tens of thousands.
• You only have a few years left on your loan. The interest savings shrink as your balance gets smaller. The first years of a loan are where the biggest interest is charged.
• You recently changed jobs or your income has dropped. Lenders assess your current financial position when you apply. If your situation has changed, you might not qualify for the rate you want.
• The rate difference is very small. A 0.10% or 0.20% gap might not be worth the time and effort once you factor in all the fees.

Step-by-Step: How to Refinance

Costs of Refinancing

Refinancing is not free. Here are the common costs you should budget for.

For a variable-to-variable refinance with no break costs, your total switching costs are usually between $300 and $1,000. Many lenders offer cashback deals of $2,000 to $4,000 for refinancers, which can more than cover these costs.

Cash-Out Refinancing

When you refinance, you can sometimes borrow more than your current balance. The extra money goes into your account as cash. This is called cash-out refinancing.

People use it for renovations, an investment property deposit, or other large expenses. The advantage is that home loan rates are much lower than personal loan or credit card rates.

The catch is that you are adding to your home loan. Your repayments go up, and you are paying interest on that extra amount for the full remaining term. If you borrow an extra $50,000 at 6% over 25 years, you will pay around $46,000 in interest on that portion alone.

Cash-out refinancing makes the most sense when the money goes toward something that increases your property's value (like a renovation) or generates a return (like an investment). Using it for a holiday or a car is generally a bad idea because you are turning a short-term expense into a 25-year debt.

Debt Consolidation Through Refinancing

If you have credit card debt, a personal loan, or a car loan, you can sometimes roll those debts into your home loan when you refinance. This is debt consolidation.

The appeal is obvious. Instead of paying 18% on a credit card, you pay 6% on your home loan. Your monthly repayments drop. You only have one payment to manage.

But there is a serious risk here that catches people out. When you roll a $15,000 credit card debt into a 25-year home loan, you are spreading that debt over a much longer period. You might pay less each month, but you could end up paying more in total interest than if you had just attacked the credit card aggressively.

If you go this route, make extra repayments to clear the consolidated amount quickly. And cut up the credit cards. The worst outcome is consolidating your debt and then running up the cards again.

Negotiating With Your Current Lender

Before you spend time on a full refinance application, pick up the phone. Your current lender does not want to lose you. It costs them far more to acquire a new customer than to keep an existing one.

Here is how to approach the conversation.

1. Do your homework first. Check the Compare page and write down two or three specific offers from other lenders, including the rate, product name, and lender name.
2. Call your lender and ask to speak with the retention team or home loan specialist. The frontline staff often cannot approve rate discounts.
3. Be direct. Tell them you are considering refinancing because you have found better rates elsewhere. Read out the specific offers.
4. Ask what they can do. Many lenders have discretionary pricing they do not advertise. They might offer a rate reduction, fee waiver, or cashback.
5. If they match or come close, great. You save the hassle of switching. If they cannot budge, you have your answer.

This one phone call takes 15 minutes and can save you just as much as a full refinance. It is always worth trying.

The Revert Rate Trap

If you are on a fixed rate, pay close attention to when your fixed period ends. On that date, your loan switches to the lender's standard variable rate. This is called the revert rate.

The revert rate is almost always higher than the rate you would get as a new customer. Sometimes much higher. It is not unusual to see revert rates that are 1% to 2% above the best available variable rates.

Lenders count on people not noticing or not bothering to act. Every month you stay on the revert rate is money you are giving away. On a $500,000 loan, a 1% rate difference costs you roughly $415 per month.

Set a reminder in your calendar for 60 days before your fixed term expires. That gives you enough time to either negotiate a better deal with your current lender or apply to refinance elsewhere.

Worked Example: Switching a $600,000 Loan

Let's say you have a $600,000 home loan with 25 years remaining. You are currently paying 6.50% and you have found a lender offering 5.80%.

In this example, the switching costs are recovered in just two to three months. After that, every dollar saved goes straight into your pocket. Over 25 years, that 0.70% rate difference adds up to nearly $79,000.

Even better, if you keep paying your old repayment amount of $4,048 instead of dropping to $3,785, you put an extra $263 toward your principal each month. That extra amount could shave years off your loan and save you even more in interest.

Run your own numbers with our Refinance Calculator to see exactly what you could save.