When refinancing is actually worth it — and the loyalty tax that funds it

Australian lenders price new customers better than existing ones. That is not a conspiracy, it is a business model — acquisition budgets buy market share, and the back book funds it. The gap between the rate a lender advertises today and the rate an untouched five-year-old loan is sitting on is commonly meaningful, and on a large balance it is real money.

Whether you should do anything about it depends on four things.

The arithmetic

Work out the annual saving first. On a $650,000 balance, a 0.40% difference is roughly $2,600 a year in interest — before considering the effect on the principal you would otherwise be paying down.

Then subtract the switching costs:

• Discharge fee from the outgoing lender
• Government registration fees — discharge of the old mortgage and registration of the new one
• Application, settlement or valuation fees at the new lender, though many are waived on refinance
• Break costs — only on a fixed rate, and potentially very large
• Lender's mortgage insurance — if your equity is below 20%, you may pay it again, and it is generally not transferable between lenders

Divide the costs by the monthly saving and you have a break-even in months. Under twelve months is compelling. Under twenty-four is usually still worth doing. Beyond that, look harder at whether the assumptions hold.

Many refinances also come with a cashback or fee waiver. Treat those as a tiebreaker, not a reason — a cashback that comes attached to a rate 0.25% higher is a loss in year two.

The trap that eats the saving

Here is the one that does the most quiet damage.

You are eight years into a 30-year loan. You refinance and the new lender writes a fresh 30-year term. Your repayment drops — partly because the rate is lower, but mostly because you have just given yourself eight extra years to repay the same balance.

The monthly number looks great. The total interest over the life of the loan goes up, often by more than the rate saving is worth.

The fix is simple and almost nobody asks for it: refinance to the remaining term, not a new full term. Twenty-two years, not thirty. If the lender's system will only write 30 years, set the repayment manually to what the 22-year figure would be. You keep the rate saving and you keep your payoff date.

When refinancing is clearly worth doing

Your fixed rate is expiring. The revert rate a loan rolls onto is rarely competitive. Start looking about three months before expiry — this is the single highest-value moment to review a loan, and it is the one most often missed because nothing prompts you.

Your equity has crossed 80%. If you originally borrowed at 90% LVR and the property has grown, you are probably still being priced as a high-LVR borrower. Crossing below 80% moves you into a different pricing tier, and the difference is usually larger than any negotiated discount.

You want to consolidate expensive debt. Rolling a car loan or credit card into a mortgage at a much lower rate reduces the monthly cost immediately. But it stretches a five-year debt across twenty-five years, and unless you deliberately keep repaying at the old rate, you will pay more in total. Consolidation is a cash flow tool, not a saving, unless you pair it with discipline.

You need to access equity. Renovation, a deposit for an investment, or capital for a business. The purpose matters for both the loan structure and, in some cases, the deductibility of the interest — so this is a conversation to have with your accountant and your broker together, before the funds are drawn, not after.

Your circumstances have changed materially. Separation, a new business, a partner returning to work, or a property becoming an investment. Each of those changes what the right structure looks like.

When to stay put

You are on a fixed rate with real break costs. Break costs are calculated on the lender's funding position and can run into five figures. Always ask for the figure in writing before assuming.

You are about to change jobs or start a business. Lenders assess employment stability. Refinance before the change, not after — a probationary period or a six-month-old ABN will narrow your options considerably.

Your equity is below 20% and you would pay LMI again. Wait for either capital growth or more principal repaid, unless the rate difference is genuinely large.

Your credit file has recent damage. Repair it first. A refinance into a specialist lender at a higher rate to escape a slightly higher rate is a poor trade.

Ask your current lender first

Before starting a full application, call the retention team and ask what they will do. The script that works is specific: name a competitor's rate, say you are preparing to refinance, and ask them to match it.

Sometimes they will, and you have your saving with no paperwork and no new mortgage. Sometimes they will not, and you have lost twenty minutes. Either way you now know your baseline. A broker will usually do this for you as the first step, because a repricing that works is faster for everyone than a refinance that takes six weeks.

The review that should be in your calendar

Set a reminder for every two years, and an earlier one for three months before any fixed term expires. Check the current rate against what is being written now, check your LVR against the current valuation, and check whether the loan structure still matches what you are doing.

Most people refinance because something went wrong or a rate rise hurt. The ones who consistently pay less do it because a date came up in the calendar.

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General information only. This is not credit assistance or a recommendation and it does not consider your objectives, financial situation or needs. Switching costs, break costs and lender criteria vary; all lending is subject to assessment. To have your own loan reviewed, book a free consult.