Top tips to refinance and cut your interest rate

You can refinance to secure a lower rate provided the reduction covers the cost of switching and your financial position supports approval.

The appeal is obvious: a percentage point drop on a substantial home loan translates to significant annual savings. But the decision depends on whether your current lender will match the market, whether refinancing costs erode the benefit, and whether your circumstances have changed since you first borrowed.

What rate reduction makes refinancing worthwhile?

A reduction of 0.30% or more typically justifies the effort and expense involved in switching lenders. Anything less may be absorbed by discharge fees, application costs, and valuation charges.

Consider a scenario where your outstanding balance sits at around the Melbourne median and you're paying 0.60% above what other lenders are offering to similar borrowers. Over 12 months, that difference amounts to several thousand dollars in additional interest. The cost to refinance usually sits between $1,000 and $1,500 when you account for discharge fees from your current lender, application fees with the new lender, and valuation costs. The saving begins to accumulate from settlement onward, which means even a modest rate drop becomes worthwhile over a two or three year period.

If your current loan includes a fixed rate that hasn't yet expired, break costs can shift the equation substantially. These are calculated based on the difference between your fixed rate and the wholesale rate your lender can access for the remaining term. In a falling rate environment, break costs can run into five figures, effectively wiping out years of potential savings.

How your financial position affects refinance approval

Lenders assess your current income, expenses, and debt position as if you were applying for the first time. Your original approval may have relied on income or employment conditions that have since changed.

In our experience, applicants often assume their existing loan is proof of serviceability, but lenders don't assess a refinance application with any more leniency than a new purchase. If you've taken on additional debt, reduced your working hours, or your living expenses have increased, you may not qualify for the same loan amount even though you've been meeting repayments without difficulty.

We regularly see this with clients who have added car finance or personal loans since their original approval. The new lender runs a fresh serviceability calculation that includes those commitments, and the borrowing capacity can come back lower than the amount you're trying to refinance. If you're also hoping to access equity at the same time, the shortfall becomes a barrier.

When your current lender will match the market rate

Most lenders would rather retain your business than lose it to a competitor, and many will reduce your rate if you request it directly. This avoids discharge fees and the time involved in a full refinance.

The outcome usually depends on how much margin your lender is making on your loan and how long you've been a customer. If you're on a rate that's 0.50% or more above what the same lender is offering new customers, there's often room to negotiate. You'll typically need to make the request in writing and be prepared to demonstrate that you've received a lower offer elsewhere.

If your current lender agrees to match or come close to the market rate, you avoid the application process, valuation, and settlement costs entirely. The rate reduction takes effect within a few weeks rather than the two months a full refinance typically requires. Not every lender will negotiate, and some will only make minor adjustments, but it's worth attempting before committing to a formal refinancing application.

Fixed versus variable rates when refinancing

The decision between fixing and staying variable affects both your immediate rate and your flexibility over the life of the loan. Fixed rates provide certainty but remove your ability to make extra repayments or exit without penalty.

If you're refinancing specifically to reduce your rate, a variable loan allows you to take advantage of further cuts without waiting for a fixed term to expire. It also means you can redirect any additional cash flow toward the loan balance without restriction, which accelerates the reduction in interest over time.

Fixed rates make sense when you need certainty over your repayment amount or when the fixed rate available is materially lower than the variable alternative. Just be clear on the restrictions: most fixed loans cap extra repayments at $10,000 to $20,000 per year, and breaking the loan early triggers costs based on the remaining term and rate differential. If your income is variable or you expect a lump sum in the next few years, those restrictions can become costly.

Costs that reduce the benefit of switching

Discharge fees, application fees, valuation fees, and settlement costs all subtract from the saving a lower rate delivers. These need to be factored into the comparison before you proceed.

Your current lender will charge a discharge fee, typically between $300 and $400, plus any government fees to remove their interest from the title. The new lender may charge an application fee, though some waive this as part of a refinance offer. A valuation is almost always required and costs between $200 and $400 depending on the property type and location. If you're using a solicitor or conveyancer to handle settlement, their fee adds another $800 to $1,200.

Together, these costs sit somewhere between $1,000 and $1,500 for a straightforward refinance with no fixed rate break costs. If the annual saving from the rate reduction is $2,000, you'll recover the outlay in the first eight months and retain the full benefit thereafter. If the saving is only $600 per year, it takes more than two years to break even, and any further rate movement in that time can shift the outcome.

Using comparison rate to assess real cost

The comparison rate incorporates the interest rate and most ongoing fees into a single percentage, which makes it easier to compare loans that have different fee structures.

A loan advertised at a low rate but with a high monthly account fee may end up costing more than a loan with a slightly higher rate and no monthly fee. The comparison rate adjusts for this by assuming a loan amount and term, then calculating what the effective annual rate would be once fees are included.

It's not perfect because it assumes you'll hold the loan for the full term and won't make extra repayments, but it provides a more accurate comparison than the advertised rate alone. When assessing refinance options, look at both figures and pay attention to whether the new loan includes ongoing fees your current loan does not.

Your current circumstances and goals matter more than reaching for the lowest advertised rate. Call one of our team or book an appointment at a time that works for you, and we'll run the numbers based on your actual loan balance, remaining term, and any costs involved in making the switch.

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