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 24/01/2024.

Lowest rates: Investors

Source: RateCity database. Based on fixed-rate home loans paying principal and interest. Data accurate as of 24/01/2024.

Many homeowners consider refinancing to secure more favourable terms, including a lower interest rate on their new home loan. By doing so, there's a potential opportunity to decrease those monthly mortgage payments, allowing individuals to save extra cash for other financial goals or necessities. 

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 6.39% (as of November 2023), who refinanced to a lower interest rate of 5.48%, could save $416 per month in repayments, or $4,992 in just a year. 

Depending on your financial situation and the terms of the deal you choose, refinancing could be a smart financial strategy for optimising your mortgage and enhancing your overall financial well-being. 

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 6.39% switching to a new loan at a lower rate of 5.48%. Current home loan rate based on RBA average ongoing variable rate for current owner-occupiers for November 2023. Does not factor in fees or rate changes. 

Refinancing to a lower interest rate can put more cash in your pocket, but remember, there's no such thing as a free ride, and refinancing often comes with costs. The good news is that even though you have to shell out some money up front, refinancing can still be a money-saver over the long haul. 

To figure out how long it'll take for your interest savings to cover the cost of switching loans, you can work out your "break-even" point. This is the amount of time it'll take for the reduced monthly payments to make up for what 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. 

Let's break it down with an example. Suppose your refinancing costs amount to $2,000. By utilising a refinancing calculator, you determine that switching loans will result in monthly savings of $100. Now, with this insight, you can calculate your ‘break-even’ point. It will take 20 months (2,000/100) for the reduced monthly payments to cover the $2,000 spent on refinancing. 

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. Various factors may influence the timeline, including the specific lenders, the need for appraisals and inspections, and the completeness of your application. 

For those seeking a faster response, some lenders may offer a Fast Track refinance option. This could enable refinancers to switch loans in as little as three days. The Fast Track process reduces the time to refinance as the new lender agrees to take on your existing debt before the title of the property is transferred to them. 

To protect themselves in case there's an issue transferring the property title from the old lender after the loan is finalised, the new lender might request you to pay for title insurance. This insurance helps cover the new lender if there are any problems with the transfer. 

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.

Refinancing your home loan can be a strategic move to lower your mortgage payments, tap into home equity, or alter your loan terms to better suit your financial situation. Whether your aim is to lower interest rates or secure more favourable mortgage terms, understanding the process of refinancing is crucial. Here's a step-by-step breakdown of the refinancing process to help you make informed decisions and potentially save thousands over the life of your loan. 

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.