Pros and cons of mortgage refinancing

woman using a calculated to calculate how much she will save when she refinances her home loan

It’s easy to assume that once you get your home loan, you don’t need to worry about it too much. 

However, once you’ve had a home loan for a few years you might consider getting it refinanced for a better deal. When you refinance, you move your home loan across to a new lender that may offer better rates and features that end up saving you more money.

So let’s take a closer look at it.

What is refinancing?

Making a home loan switch for a better rate is often referred to as ‘refinancing’ and could save you thousands of dollars. You might even receive better benefits and features in the process. 

Depending on your new lender, you may even snag some cashback offers. But refinancing takes some research first, which we’ll get into below.

Advantages of refinancing

Just like any financial product, refinancing is not for everyone. But if you’re on the fence about refinancing, below are some advantages you may gain when switching your home loan to a new lender.

Lower monthly mortgage payments

When you refinance to a lower interest rate not only can you reduce your mortgage repayments, but you may be able to pay off your loan quicker.

See how much you can save by using our repayment calculator below.

Access home equity

Home equity refers to your loan-to-value ratio (LVR), the percentage of the property value you own rather than the lender. Typically, you build up equity as you pay down your mortgage because you own more of the house–and lower your LVR. Lower LVRs are a great bargaining chip for lower interest rates. 

Alternatively, you can use your home equity to:

Related: Can you use your home equity to refinance?

Shorten your loan term

By refinancing your home loan, you can choose a new loan term length. For example, if you’re on a 25 year loan you can reduce it to 15 years. Remember that shorter loan lengths mean your repayments may increase, but if you’re in a position to do so, paying off your loan quickly can save you extra interest over the life of the loan.

Change from a variable rate to a fixed rate

If you’re on a variable home loan interest rate, you can switch to a fixed rate by refinancing. With a fixed rate home loan, you lock in an unwavering interest rate for one to five years. This could benefit those anxious about the constantly changing variable rates typically prompted by Reserve Bank Australia’s cash rate hikes. 

Locking in a fixed rate also lets you know exactly how much your mortgage repayments will be for the next few months or years.

Cash out refinancing

Cash out refinancing allows you to access your equity by taking out a new loan with a bigger loan balance than your current loan. You receive the difference between the two loans in cash.

With cash out refinancing, you could use the extra money to consolidate debts, pay for home renovations, or use it as an investment property deposit.

Disadvantages of refinancing

Refinancing isn’t for everyone and it’s important to do your research and consult your financial advisor before committing to the switch. 

Below are some disadvantages of refinancing your mortgage.

Risk of losing equity

It’s possible to reduce the equity in your property when getting a cash out refinance. For example, if you have $100,000 in equity and take $30,000 out in cash out refinance, you’ll only have $70,000 equity left.

Risk of not qualifying

Just because you qualified for your first mortgage doesn’t mean you’ll be approved for refinancing. Circumstances change over time and if your refinance application isn’t approved it will impact your credit score, which could make it harder to receive a lower interest rate for future applications.

Exit fee or prepayment penalties

Many home loans come with discharge fees that you must pay as a penalty for breaking the loan contract early or paying off the loan. While these fees are only a couple of hundred dollars it's still something to consider when refinancing.

Monthly repayments could increase

If you refinance to a shorter term loan, your mortgage repayments will likely go up because you’ve reduced the time you have to pay off your loan.

Typically longer loans have smaller monthly repayments, but you accumulate more interest over the life of the loan. This is worth weighing up. With a shorter loan, you might pay less interest, but your repayments can be significantly larger.

Related: Refinance your home loan 

When refinancing, weighing the pros and cons is essential. If you need more information about refinancing check out Mozo’s home loan guides. But if you’re ready to refinance now, be sure to visit Mozo’s home loan refinancing comparison hub.

Home loan comparisons on Mozo - last updated 26 February 2024

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure
  • Neat Home Loan

    Owner Occupier, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.09% p.a. variable
    6.11% p.a.

    Competitively-priced variable rate loan. Ideal for owner occupiers and investors. No service fees to pay. Make free extra repayments and redraws. Flexible repayment schedule available.

    Compare
    Details
  • Straight Up

    Obliterate, Owner Occupier, Principal & Interest, <50% LVR

    interest rate
    comparison rate
    Initial monthly repayment
    6.24% p.a. variable
    6.24% p.a.

    Get a low variable rate depending on your deposit with Athena’s Straight Up Variable Home Loan. AcceleRATES feature helps you to reduce your home loan even faster (T&Cs apply). Zero fees to pay. Free redraw facility. Handy mobile app to manage your home loan.

    Compare
    Details
  • Flex Home Loan

    Fixed, Owner Occupier, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.64% p.a.
    fixed 3 years
    6.52% p.a.

    Competitive Fixed rate. Multiple offset accounts available. Borrowers can also make extra repayments. Redraw facility available. Simple online application process. 40% deposit required.

    Compare
    Details
  • Straight Up

    Obliterate, Investor, Principal & Interest, <50% LVR

    interest rate
    comparison rate
    Initial monthly repayment
    6.34% p.a. variable
    6.34% p.a.

    Investors get a low variable rate depending on your deposit with Athena’s Straight Up Investor Variable Home Loan. AcceleRATES feature helps you to reduce your home loan even faster (T&Cs apply). Zero fees to pay. Free redraw facility. Handy mobile app to manage your home loan.

    Compare
    Details
  • Fixed Rate

    Owner Occupier, Principal & Interest, <80% LVR

    interest rate
    comparison rate
    Initial monthly repayment
    6.54% p.a.
    fixed 2 years
    7.10% p.a.

    Enjoy up to $3000 cashback for eligible first home buyers and $2000 cashback for refinancers on eligible home loans with the ANZ Fixed Rate Home Loan. Get the security of repayment certainty with a competitive locked in rate. No ongoing fees to pay. Offset account on 1-year fixed loans ($10/month fee applies). Interest-only payments allowed.

    Compare
    Details

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.