Refinancing to change your loan terms can ease the pressure on your budget, but only if you know what the change costs. Most of the mistakes below come from looking at the new repayment and not the full picture.
If you live in the Sutherland Shire and are thinking about a new term, a different rate type or extra features, these are the areas worth checking before you sign. Our refinancing page explains the wider process.
Does Refinancing to a Longer Loan Term Save Money?
Stretching your loan over a longer term lowers your required repayment, but you usually pay more interest overall because you owe money for longer. ASIC's guidance says that if repayments fall only because the term is longer, the borrower should be told they will pay more interest or charges over that term.
As an example, consider a homeowner with $500,000 left to pay over 25 years. Their budget has tightened after a change in family circumstances. At an illustrative rate of 6.75% p.a., the repayment on that loan is about $3,455 a month. If they refinance to a new 30-year term at the same illustrative rate, the repayment drops to about $3,243 a month, which is roughly $212 less.
That relief is real, but the extra five years means more interest in total. So they keep the lower required repayment as a safety net and, when their budget allows, pay extra into the loan. They get breathing room now and can still repay the loan sooner if things improve. The trade-off is that the discipline of the higher repayment is gone, so extra payments only help if they actually happen. A repayment calculator will show how your own numbers play out.
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Fixed Rate Break Costs and Discharge Fees to Check First
Break fees apply when you end a fixed rate loan before the fixed period finishes, and they do not apply to variable rate loans. A discharge fee can apply whenever you close a loan, and a new loan may carry an application fee.
For home loan contracts entered into on or after 1 July 2011, lenders are not allowed to charge a fee for ending a loan secured over residential property. That rule does not cover break fees or discharge fees, so those can still apply. Moneysmart also lists switching fees on an internal refinance and possible lenders mortgage insurance if you have less than 20 per cent equity.
ASIC's guidance expects any saving to be weighed against all costs, including broker fees. If your fixed term is close to ending, waiting may avoid the break cost altogether. Our fixed rate expiry page covers what to line up before your rate rolls off.
Switching Between Fixed and Variable: What You Give Up
Moving to a fixed interest rate gives you certainty for a set period, while a variable interest rate can move up or down with your lender's decisions. Neither is automatically the right choice, and each has a trade-off.
Fixing gives you a repayment you can plan around, but leaving early can trigger a break fee. Staying variable avoids that fee, but your repayments can rise. Either way, check the features of the new loan, such as an offset account or redraw facility. If you currently use one to reduce interest, make sure the new loan has it, and ask what it costs. Features and fees differ between lenders.
A loan health check compares your current loan with the options available, so you can see what you would keep, gain or lose.
Adding to Your Loan When You Change Terms
If you borrow more as part of a refinance, the lender treats it as new lending and assesses it more closely than a like-for-like switch. When a refinance only moves your existing debt to a lower rate, ASIC says your repayment history can carry more weight.
Banks must assess your ability to repay at a rate at least 3 percentage points above the loan's rate, according to APRA's current standard. Extra borrowing for renovations, a car or to release equity raises your balance and therefore your repayments. You can check where you stand with our borrowing capacity tools.
Tax can also change. The ATO says interest on any part of a loan used for private purposes cannot be claimed against a rental property, even if that property is the security. If your refinance involves an investment property, speak to your accountant before you add any funds.
Refinancing a 5% Deposit Scheme Loan: Terms You Cannot Change
If your loan sits under the Australian Government 5% Deposit Scheme, you may be able to refinance to another participating lender and keep the benefit, but you cannot increase the loan or extend the term. Housing Australia also states that moving to a lender outside the scheme counts as full repayment of the loan, so the scheme benefit is lost.
If the benefit ends while your balance is above 80 per cent of the property value, your lender may apply lenders mortgage insurance or other costs under its policies. That makes a term extension or a cash-out unsuitable for these loans, so check your scheme conditions before asking any lender for a new structure.
If you are in Cronulla, Caringbah, Miranda, Sutherland or Sylvania and want to talk it through, we are close by.
Frequently Asked Questions
Does a longer loan term save money?
A longer term lowers your required repayment, but you usually pay more interest overall because the debt lasts longer. You can limit this by making extra repayments when your budget allows.
Can I be charged a fee for leaving my home loan?
Lenders cannot charge a fee for ending a home loan secured over residential property, for contracts entered into on or after 1 July 2011. Break fees on fixed rate loans and discharge fees can still apply.
Does borrowing more in a refinance affect tax?
It can. Interest on any part of a loan used for private purposes cannot be claimed against a rental property. Speak to your accountant before adding funds to an investment loan.
Can I extend the term on a 5% Deposit Scheme loan when I refinance?
No. Housing Australia's guidance says you cannot increase the loan amount or extend the term and keep the scheme benefit. Moving to a lender outside the scheme also ends the benefit.
