Top Strategies to Refinance to a Lower Interest Rate

A lower rate only helps if the savings outweigh the cost of switching. For Newcastle homeowners, the decision comes down to comparing your repayments today with the repayments on a new loan, after fees are counted.

This article walks through how to test that, what costs to look for, and the points that can change the answer. If you want a second opinion on your own numbers, our loan health check is a good place to start.

How Do You Know If Refinancing to a Lower Rate Is Worth It?

Refinancing is worth it when the total savings on the new loan are larger than the total cost of moving. That means comparing the interest saving against exit, discharge and application costs, not just comparing two headline rates.

ASIC's responsible lending guidance points the same way. It says a switch should produce overall cost savings that outweigh any lost benefits, with all fees and charges counted, including broker fees. Sometimes a small saving is still worthwhile if the new loan suits your needs better, but the trade-off should be clear before you proceed.

Two checks matter most:

• The gap between your current rate and the new rate, applied to your actual loan balance.
• The one-off costs of leaving, which differ by lender.

What a Lower Rate Looks Like in Real Numbers

A rate cut of 0.50 percentage points on a $500,000 loan can reduce repayments by roughly $150 to $170 a month on a 25-year term, but the exact figure depends on the term remaining. The example below is illustrative only and uses a rate of 6.75% p.a.

Consider a Newcastle homeowner with a $500,000 balance and 25 years left. At 6.75% p.a., the monthly principal and interest repayment is about $3,455. If a lender offered 6.25% p.a. on the same balance and the same 25-year term, the repayment would be about $3,298. That is a difference of roughly $157 a month, or about $1,884 a year.

Say switching costs total $900 in discharge and application fees. At $157 a month, those costs are recovered in under six months, and the saving then continues for as long as the rate gap holds. If the same homeowner faced $5,000 in costs, recovery would take about 32 months, and the answer becomes less clear. The outcome is that the same rate gap can be a clear yes or a marginal call, depending entirely on the cost of leaving. Rates in this example are illustrative, and what you are offered will depend on your deposit size, equity and lender. Use a repayment calculator with your own figures to test it.

Which Costs Can Eat Into Your Savings?

The main costs are a break fee if you are on a fixed rate, a discharge fee from your current lender, and an application fee on the new loan. Some lenders also charge a fee for switching internally.

Fees for leaving a variable loan have been limited by law for residential loans signed on or after 1 July 2011, so an ordinary exit fee is generally prohibited. Break fees and discharge fees are different and are not covered by that ban. Amounts vary by lender, so ask for the figures in writing before you commit.

If you have less than 20% equity, lenders mortgage insurance may apply on the new loan, which can add to the cost. You can ask about a refund of some of the LMI on your existing loan. In New South Wales, mortgage duty was abolished from 1 July 2016, so it is not a cost to budget for on a Newcastle refinance.

Coming Off a Fixed Rate: When to Act

If your fixed rate period is ending, you can usually refinance without a break fee once the term finishes. Starting the process before expiry gives you time to compare options. Our fixed rate expiry page covers what to expect.

Breaking a fixed loan early can trigger a break fee, which depends on how your lender calculates its loss. If a fee is large, it may be sensible to wait until the fixed term ends. Many lenders move expiring loans to a variable rate that can be higher than what is on offer elsewhere, so a review before the date is worthwhile.

Should You Look at Features, Not Just the Rate?

Yes. An offset account or redraw facility can reduce interest in a way a headline rate does not show, but these features often come with a higher rate or an annual fee.

As an example, consider a Newcastle couple with a $450,000 loan who keep $30,000 in savings. If that sits in an offset account, interest is only charged on $420,000 while the money stays there. Their lender's package loan carries an annual fee, so the couple weigh that fee against the interest saved before choosing. The outcome is a loan that costs a little more in fees but reduces interest each month, since the savings stay accessible. If they would not actually keep a balance in the account, the feature would not pay for itself, and a lower-fee loan would suit them better.

Our refinancing team can compare loan features alongside rates, so you see the full cost of each option.

Will Your New Lender Approve the Switch?

A new lender will check your income, expenses and repayment history, and approval is not automatic. Lenders must test whether you can afford repayments at a rate 3 percentage points above the loan rate, as set by APRA.

For a refinance with no extra borrowing, ASIC notes that a lender can focus on your payment history. A record of regular repayments on time, ideally covering around 12 months, helps. Your borrowing capacity can also shift if your circumstances have changed since you took out the loan, for example through lower income or reduced equity. APRA has noted that some borrowers may not meet standard criteria and will be assessed case by case.

A property valuation also affects the result, because your loan-to-value ratio decides which rates and fees apply.

What If You Borrow More or Hold an Investment Property?

Adding to your loan during a refinance changes the deal, and any extra borrowing can alter how interest is treated for tax. A refinance that releases equity is no longer a simple like-for-like switch.

For an investment property, the ATO says interest is deductible only on the part of the loan used to produce income. If you add money for a private purpose, interest must be apportioned. Speak with your accountant before restructuring an investment loan, as tax outcomes depend on your situation.

If you hold a loan under the Australian Government 5% Deposit Scheme, check the rules first. Switching to a lender outside the scheme ends the benefit, and increasing the loan or extending the term can also affect eligibility.

The Newcastle Refinance Process, Step by Step

The process generally runs in four stages: review your current loan, compare options, apply, then settle and discharge. Most of the work is gathering your current loan details and recent repayment history.

Your broker will review your rate, balance, fees and features, then compare lenders against your goals. After you choose a loan, the application is lodged and the lender values the property. When approved, the new lender arranges the discharge of the old loan and settlement. You will need to sign a discharge authority form with your current lender.

Repayments on the old loan continue until settlement is complete, so keep paying as usual.

If you are unsure whether your current loan is still competitive, we can run the numbers with you. Call one of our team or book an appointment at a time that works for you, and we will give you a clear, written comparison of your options.

Frequently Asked Questions