Refinance home loan comparison

The definition of a favourable interest rate largely depends on your specific refinancing goals and financial needs. In general, it's important to recognise that the standard interest rate often remains around 2-3% higher than the current base rate. This guideline can serve as a helpful reference as you evaluate the interest rates available to you.

At the time of writing, the lowest interest rates for refinancers paying principal and interest are:

Lowest variable rates: Owner-occupiers

Source: RateCity database. Based on variable rate home loans paying principal and interest. Data accurate as of 26/06/2023.

Lowest rates: Investors

SSource: RateCity database. Based on fixed-rate home loans paying principal and interest. Data accurate as of 26/06/2023.

One of the primary motivations for homeowners to explore refinancing is the opportunity to secure a lower interest rate on a new loan. By taking advantage of a lower interest rate through refinancing, homeowners have the potential to save on their mortgage payments.

RateCity research shows that a homeowner with a 25-year, $750,000 home loan on the RBA’s average ongoing variable rate for current owner-occupiers of 5.46% (as of January 2023), who refinanced to a lower interest rate of 4.85%, could save $269 per month in repayments, or $3,228 in just a year.

How much a homeowner may save by refinancing

Note: Table is for illustrative purposes only. Based on a hypothetical example of a customer on a 25-year home loan with different loan sizes on a rate of 5.46% switching to a new loan at a lower rate of 4.85%. Current home loan rate based on RBA average ongoing variable rate for current owner-occupiers for January 2023. Does not factor in fees or rate changes.

While refinancing to a lower rate can save you money, there’s no such thing as a free lunch and refinancing is likely to come with expenses. However, the positive thing is that despite the upfront costs, refinancing could save you money in the long run.

To find out how long it might be before your interest savings cancel out the cost of switching loans, you can calculate your ‘break-even’ point. The ‘break-even’ point refers to the length of time it takes for reduced repayments to offset the amount you spent on refinancing.

You can use a refinancing calculator to determine your ‘break-even’ point. Use the calculator to estimate your monthly savings from switching home loans and then compare this to your total switching cost. Knowing how long it’ll take you to recoup the refinancing costs could help you make an informed choice.

When it comes to choosing the best home loan for your refinancing needs, it’s crucial you compare a range of factors, including interest rate type, loan term and features. Different home loan types may suit different homeowner needs. 

Fixed vs variable

Fixed interest rates

A fixed interest rate home loan is one in which the rate is locked in, and will not fluctuate throughout the fixed period - typically 1-5 years. If you’re the type of home loan customer that loves stability in your budget and knowing exactly how much you’ll repay in monthly mortgage payments, a fixed rate loan may be worth considering.  

Variable interest rates

A variable interest rate home loan is subject to market fluctuations, meaning that if the lender were to change its interest rates, your rate would move as well. Interest rates on mortgages are mostly influenced by the Reserve Bank of Australia (RBA)’s cash rate. When the cash rate moves, so too should your variable interest rate - for good and for bad. 

Also, a lender will typically reserve its features, such as an offset account, for its variable rate loans. If loan features are important to you, it is worth keeping this in mind. 

Split rates

It can be challenging to choose between the benefits of fixed and variable rates. This is where a split rate loan comes in. As the name suggests, the lender allows you to split your interest repayments between a fixed and variable rate. It does not have to be split 50/50, but could be 20% variable and 80% fixed, for example. 

A split rate loan may allow you to protect a portion of your repayments from fluctuations in the market, while taking advantage of any interest rate drops and nabbing helpful home loan features in the process. 

Loan term

The loan term is crucial to consider when choosing your ideal refinancing loan. A typical loan term is 25-30 years. If you’ve been repaying your mortgage for some time now, you want to ensure you try and match your remaining loan term with the new loan. Refinancing and extending your loan term back to a full 30 years might not be ideal, as it could see you paying tens of thousands of dollars more in interest over time.

By matching your new loan term with what’s left on your current mortgage, you could potentially pay off your debt sooner while avoiding unnecessary interest expenses. The longer the loan term, the more interest you’ll likely end up paying in the end, despite switching to a lower interest rate. If you’ve already made substantial progress in paying off your current loan, opting for a similar or shorter term during refinancing could help you save some money and own your home sooner.

Features to consider

When comparing your refinancing options, home loan features can be a priority for some homeowners. After all, when used correctly, they may save you in the long run. 

Offset accounts

An offset account is a linked transaction account that helps to reduce, or ‘offset’, the interest charges on your mortgage. Any funds you deposit into this transaction account will help to lower the amount of interest the lender may charge you. For example, if you had a $600,000 home loan with $50,000 in the offset account, you may only be charged interest as if your loan balance was actually $550,000.

Extra repayments

Some lenders may allow you to make extra repayments on your home loan to help you chip away the principal owing and pay off your debt faster than the loan term. Making additional repayments is arguably one of the most successful ways a homeowner can pay off their mortgage early. 

Redraw facility

Wouldn’t you love to access the extra repayments you’ve made into your mortgage for a rainy day? This is where a redraw facility comes in. You may be able to draw down on some or all of the extra repayments you’ve made into your mortgage over the years if your loan offers a redraw facility.

Home loan portability

If you’re planning on selling your home and purchasing a new one at some point, you may want to consider a portable mortgage. Home loan portability is a feature that allows homeowners to stay on the same mortgage but change the security (the property). 

This is considered a more affordable alternative to refinancing, as you can bypass a lot of the fees and costs involved in switching providers, while maintaining the same linked bank accounts and other credit products. This may be worth considering if your current home loan provider already offers portability.

The refinancing process in Australia typically takes between two and four weeks, depending on your situation and the lenders involved. 

However, some lenders offer a Fast Track refinance option, which may allow refinancers to switch loans in as little as three days. Even though refinancing can require some of your time and effort, the potential benefits could make a significant difference over your remaining home loan term.

Refinancing isn’t free, but the benefits of refinancing may help to make up for its costs. When you refinance, you may have to pay between a few hundred dollars to a few thousand, in additional charges. 

Fees and costs

Upfront service fees ($570 average)

Covers the admin cost of setting up your new home loan.

Valuation fee ($400 - $550)

Covers the cost of valuing the property as part of the mortgage application process.

Discharge fee ($300 average)

Covers the paperwork when you end a home loan, including when you switch to a new lender.

Break costs ($ varies)

If your existing home loan is on a fixed interest rate, you may need to pay a fee to refinance from this arrangement. This is found by multiplying your remaining loan amount with the remaining fixed term, and the change in costs of funding. 

Lender’s Mortgage Insurance (LMI) ($ varies)

An insurance policy that covers the lender (not the borrower) against the risk that you’ll default on your mortgage repayments. Charged when your deposit and/or equity used to secure a loan is less than 20% of the property value. The higher your property value, the higher the potential LMI. It can range from thousands to tens of thousands of dollars.

1. Ask your lender for a better rate: If your current lender will match the market rates, you may save some costs involved in switching
2. Compare current rates in the market: Compare interest rates, annual fees, features and benefits, as well as eligibility requirements and lending criteria, and consider which loan options may be able to help you achieve your goals.
3. Calculate your equity and weigh up the costs: Your equity will determine which loans you can apply for. You’ll also need to check what fees and charges you’ll need to pay to exit your current loan and switch to a new loan offer.
4. Choose your new loan: Based on the information at hand, decide if you still want to switch lenders, and which mortgage you’d like to choose.
5. Apply, fill out the form and provide all your documents: Click the apply button and have information like your payslips, driver’s license and credit card statements ready. Your prospective lender may then contact you about having your property valued.
6. Once approved, settle and transfer: If you’re been approved, you will choose a settlement date. Then your new lender will arrange to pay out your older lender. Congratulations, you’ve just refinanced.