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Refinancing Mistakes and Official Sources

Home loan refinancing mistakes that cost Australians thousands, and how to avoid them

The most expensive refinancing and fixed rate mistakes on Australian home loans, from term resets and revert rates to cashback traps and LMI, with the dollar cost of each.

Updated · 5 min read

Home loan refinancing mistakes that cost Australians thousands, and how to avoid them

The costliest refinancing mistakes are not dramatic. They are resetting the loan term to 30 years without noticing, letting a fixed rate roll onto a high revert rate, picking a loan for its cashback rather than its rate, and discovering after the valuation that the new loan needs lenders mortgage insurance. Each can cost thousands of dollars, and some cost tens of thousands over the life of the loan. Most are avoided by doing three things: comparing on your remaining term, asking your current lender to match before you leave, and getting every cost in writing before you sign.

This is the starting guide for the Refinancing Mistakes and Official Sources section. It links to every guide in the section. Figures are illustrative.

Mistake 1: resetting the term to 30 years

A new lender usually offers a 30-year term by default. The repayment drops, which feels like a saving, but much of the drop comes from stretching the loan, not from the lower rate.

In the refinance worked example, a $520,000 balance with 26 years left moves from 6.49% to 5.89%. Keeping 26 years saves about $60,700 of interest before costs; resetting to 30 years costs about $31,400 more than not refinancing at all.

Fix: ask for a term equal to your remaining term, or take the longer term and keep paying the higher repayment.

Mistake 2: rolling off a fixed rate unnoticed

When a fixed rate ends, the loan reverts to the lender's variable rate for your loan type, which can be well above what new customers are offered.

Illustrative example: $500,000 with 27 years left. The fixed rate was 5.49% (repayment about $2,962.64). It reverts to 7.09%: about $3,468.46 a month. A competitive variable rate of 5.99% would be about $3,116.81. Rolling off unnoticed costs about $352 a month, over $4,200 a year.

Fix: set a reminder three months before expiry, ask your lender for its best rate, and compare. No break costs apply once the fixed term has ended.

Mistake 3: choosing the cashback, not the rate

A cashback of $2,000 to $4,000 is tempting, but a rate 0.20 points higher on $520,000 costs about $1,000 a year. Within two to four years the cashback is gone. Cashbacks also come with conditions, such as a minimum loan size, a settlement deadline and sometimes a clawback if you leave early.

Fix: compare the loans' total cost over the years you will keep the loan, then treat the cashback as a bonus.

Mistake 4: ignoring LVR until the valuation

If your property is valued lower than you expected, your LVR may land above 80%, and the new lender may require LMI. LMI paid on your current loan is generally not transferable, so you could pay it twice.

Fix: ask for the valuation early, before paying fees. If you are near 80%, consider a small lump-sum repayment first, or stay and negotiate. See deposit, LVR and LMI.

Mistake 5: breaking a fixed rate without a written quote

Break costs depend on how wholesale rates have moved since you fixed, and they change daily. Refinancing on a phone estimate, then receiving a higher figure at settlement, can wipe out the saving.

Fix: request a written break cost quote, ask how it was calculated, and compare with waiting until the fixed term ends. See fixed rate break costs.

Mistake 6: not asking your current lender first

Lenders often give their best rates to new customers. Existing customers can usually get a lower rate just by asking, with no switching costs and no new credit assessment.

Fix: use the script in asking your lender for a lower rate.

Mistake 7: assuming you will pass the new lender's assessment

A new lender assesses you from scratch, including the serviceability buffer. If your income has dropped, your expenses have grown or you have new debts, you may be declined, and the credit enquiry stays on your report.

Fix: check borrowing power with the lender or a broker before formally applying; see borrowing power and the serviceability buffer.

Mistake 8: stopping repayments before settlement

Your old loan stays active until the new lender pays it out at settlement. Missing a repayment in the meantime creates arrears and a negative entry in your repayment history.

Fix: keep paying until the old lender confirms the loan is discharged, then cancel direct debits and move bills. The steps are in the refinancing process and timeline.

Mistake 9: rolling short debts into a long loan

Adding a $30,000 car loan to the mortgage can lower its rate, but spreading it over 25 or more years can mean more interest overall.

Fix: if you consolidate, add an extra repayment that clears that amount within the original car loan term.

Mistake 10: trusting advice without checking it

A broker must act in your best interests, but you should still understand why a loan was recommended. See mortgage broker vs going direct.

If something has already gone wrong

Frequently asked questions

How soon after buying can I refinance?

There is no legal minimum. Fixed rate break costs, LMI and the cost of a second valuation are the usual reasons to wait.

Does refinancing hurt my credit score?

A credit enquiry is recorded with each application. A single well-prepared application has a limited effect; several in a short time can look like credit stress.

Is it worth refinancing a small balance?

Fixed switching costs weigh more on a small loan. Run the refinance calculator: if break-even is longer than you will keep the loan, stay and negotiate instead.

What if my lender will not let me go?

A lender cannot stop you repaying a loan, but it can require a discharge authority, the payment of fees and any break costs. Exit fees on variable loans from 1 July 2011 are banned.

Sources

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