Refinancing is usually pitched as a simple comparison: your rate against a lower one. The arithmetic is rarely that clean, and one of the costs is almost never mentioned in the advertising.
Advertisement
The costs to count
- Discharge or termination fees from your existing lender.
- Application, settlement and valuation fees at the new lender, sometimes waived as an incentive.
- Government charges for discharging and registering the mortgage.
- Break costs if you are leaving a fixed rate, which can be substantial and are not capped.
- A second LMI premium if you are still above 80% LVR, since LMI does not transfer between lenders.
That last one catches people out. A borrower who bought with a small deposit and refinances a year later for a better rate can find a fresh LMI premium wipes out several years of savings.
The hidden cost: resetting the term
This is the one that does the most damage and appears in no comparison table.
Refinancing usually starts a new 30-year loan. If you were five years into your original term, you have just moved your finish line back five years. Your repayment falls — which feels like a win — but you have extended the period over which interest accrues.
It is entirely possible to refinance to a lower rate and pay more total interest than if you had stayed put. The lower rate is real; the longer term more than offsets it.
The fix is straightforward: ask for the new loan over your remaining term rather than a fresh 30 years. If the lender will not, keep the 30-year term but set your repayment to the amount you were paying before, which achieves the same thing voluntarily.
A sensible way to compare
Compare total cost over the same period, not the monthly repayment. Model your current loan for its remaining term, then model the new loan over that same remaining term including all switching costs.
If the new loan wins over an identical horizon, the saving is genuine. If it only wins on monthly repayment, you are likely comparing a shorter remaining term against a longer new one.
Advertisement
Ask your current lender first
Lenders price to win new customers, not to retain existing ones, and rarely reduce a rate unprompted. A retention team will often match or approach a competitor’s offer when told you are leaving.
This costs nothing, takes one phone call, and avoids every switching cost above. It is worth doing before starting an application elsewhere — and worth repeating periodically even if you are not planning to move.
Cashback offers
Cashback incentives are real money, but check what rate applies once any introductory period ends. A cashback attached to a rate that drifts above market within a year or two can cost more than it paid.
Weigh the cashback against the total cost over your remaining term, in the same way as the rate itself.
Key takeaways
- —Count discharge fees, break costs and a possible second LMI premium, not just the rate.
- —Refinancing usually resets your term to 30 years, which can outweigh a lower rate.
- —Compare total cost over the same remaining term, not monthly repayments.
- —Ask your current lender to match first — it costs nothing and avoids switching fees.
General information only. This guide explains how these products generally work. It does not take account of your objectives, financial situation or needs, and is not financial product advice under the Corporations Act 2001 (Cth). Figures are illustrative. Speak to a licensed financial adviser before acting.