Refinancing

Refinancing is the process of replacing your existing loan with a new one—typically from a different lender—to secure a better interest rate, access equity, consolidate debt, or change loan features. It's one of the most powerful ways to save money or unlock capital.

Why People Refinance

1. Lower Interest Rate

The most common reason. Even a 0.5% rate reduction saves thousands.

Example:

• Current loan: $500,000 at 6.5% p.a., 25 years remaining
• Monthly payment: $3,370
• Refinance to: 5.9% p.a.
• New monthly payment: $3,210
• Monthly savings: $160 = $48,000 over 25 years

2. Access Equity

If your property has increased in value, refinancing lets you access that equity for renovations, investments, or debt consolidation.

Example:

• 2020: Bought property for $600,000, borrowed $480,000 (80% LVR)
• 2025: Property now worth $800,000, loan balance $450,000
• Available equity: $800,000 × 80% = $640,000 (max borrowing)
• Current loan: $450,000
• Can access: $190,000 in equity (for renovations, investment property deposit, etc.)

3. Consolidate Debts

Combine high-interest debts (credit cards, personal loans) into your lower-rate home loan.

Example:

• Home loan: $400,000 at 6.0% p.a.
• Credit card 1: $15,000 at 21% p.a. ($3,150/year interest)
• Credit card 2: $10,000 at 19% p.a. ($1,900/year interest)
• Personal loan: $25,000 at 12% p.a. ($3,000/year interest)

Before refinancing:

• Total debt: $450,000
• Total annual interest: $24,000 (home) + $8,050 (cards/loans) = $32,050/year

After refinancing:

• New home loan: $450,000 at 6.0% p.a.
• Total annual interest: $27,000/year
• Savings: $5,050/year

4. Switch from Interest-Only to Principal-and-Interest

When your interest-only period ends, your repayments can jump significantly. Refinancing can smooth this transition.

Example:

• Current: $600,000 interest-only at 6.5% p.a.
• Monthly payment: $3,250 (interest only)
• Interest-only period ending
• Reverting to P&I: $4,200/month (29% increase)
• Refinance to P&I at 5.8% p.a.: $3,650/month (saves $550/month)

5. Switch from Variable to Fixed (or Vice Versa)

Lock in a rate if you expect rates to rise, or switch to variable for flexibility.

Example:

• Current: Variable at 6.8% p.a.
• RBA expected to raise rates further
• Refinance to fixed at 6.2% p.a. for 3 years
• If variable rises to 7.5%, you save 1.3% p.a. for 3 years

6. Remove or Add Features

Get an offset account, redraw facility, or remove features you don't need to lower costs.

Example:

• Current loan: No offset, paying $15/month package fee
• Refinance to: Loan with 100% offset account
• Offset savings: $500/month in offset saves $3,000/year in interest (at 6% p.a. on $500K loan)

When to Refinance

Interest Rate Difference of 0.5%+ Justifies It

Break-even calculation:

• Refinancing costs: ~$2,000-$4,000 (application fees, valuation, discharge fees)
• Monthly savings from 0.5% rate reduction on $500K loan: ~$160
• Break-even: 12-25 months

If you're staying in the property for 2+ years, refinancing usually makes sense.

Your Property Has Increased in Value

If your LVR has dropped due to property value increases or loan repayments, you qualify for better rates.

Example:

• 2021: Borrowed $500,000 on $600,000 property (83% LVR)
• Rate: 6.5% p.a. (high LVR premium)
• 2025: Property worth $750,000, loan balance $470,000 (63% LVR)
• Refinance at low-LVR rate: 5.8% p.a.
• Savings: $230/month = $69,000 over 25 years

You Want to Access Equity

Property values have risen, and you need capital.

Example use cases:

• Renovations: Access $100,000 for kitchen/bathroom (increases property value)
• Investment property deposit: Use $150,000 equity to buy second property
• Pay for children's education: Access $80,000 for private school fees
• Start a business: Use $200,000 equity as business capital

Your Fixed Rate Is About to End

Fixed rates often revert to higher variable rates. Refinancing before reversion can save significantly.

Example:

• Fixed rate ending: 3.9% p.a. (locked in 2021)
• Revert rate: 7.2% p.a. (current variable)
• On $450,000 loan: Repayments jump from $2,250 to $3,050/month (+$800/month)
• Refinance to new lender at 5.9% p.a.: $2,700/month (saves $350/month)

How Refinancing Works

Step 1: Assess Your Current Loan

Check:

• Current interest rate and monthly repayment
• Loan balance and remaining term
• Early exit fees (break costs for fixed loans, discharge fees)
• LVR (current property value vs loan balance)

Example:

• Loan balance: $420,000
• Property value: $650,000 (get free estimate on NIK Finance)
• LVR: 65% (good for refinancing)
• Exit fees: $350 discharge fee, no break costs (variable loan)

Step 2: Compare New Loans

Use a broker (NIK Finance compares 100+ lenders) or compare yourself.

Look for:

• Lower interest rate (comparison rate, not just advertised rate)
• Loan features (offset, redraw, extra repayments)
• Fees (application, valuation, annual)

Example comparison:

• Current: 6.5% p.a., no offset, $10/month fee
• Option A: 5.8% p.a., 100% offset, $15/month fee, $600 application fee
• Option B: 5.9% p.a., no offset, $0 fees
• Winner: Option A (offset saves $3,000+/year in interest, outweighs $60/year fee increase)

Step 3: Apply and Get Approval

Submit application with:

• Proof of income (payslips, tax returns for self-employed)
• Bank statements (3 months)
• Property valuation (lender arranges)
• ID and loan statements

Timeline:

• Application: 1-2 hours
• Assessment: 3-10 days
• Approval: Conditional approval in 5-14 days

Step 4: Settlement

The new lender pays out your old loan and sets up the new one.

Timeline:

• Settlement: 14-30 days after approval
• Your old loan is closed, new loan begins

Example:

• Day 1: Submit application
• Day 7: Conditional approval
• Day 21: Formal approval
• Day 35: Settlement, new loan active

Costs of Refinancing

Typical Costs

Application fee:

• Range: $0-$800
• Average: $400

Valuation fee:

• Range: $0-$400 (some lenders waive this)
• Average: $200

Discharge fee (from old lender):

• Range: $150-$400
• Average: $350

Settlement fee:

• Range: $0-$300
• Average: $150

Government fees (mortgage registration):

• Range: $100-$200 (varies by state)

Legal fees (optional):

• Range: $500-$1,500 (not always necessary)

Total typical cost: $1,500-$3,500

Break Costs (Fixed Loans Only)

If you're exiting a fixed loan early, you may pay break costs.

Break costs depend on:

• Remaining fixed period
• Difference between your fixed rate and current rates
• Loan balance

Example (rates have fallen):

• Your fixed rate: 6.0% p.a., 2 years remaining
• Current fixed rates: 5.0% p.a.
• Loan balance: $500,000
• Break cost: ~$10,000 (lender loses 1% p.a. for 2 years)

Example (rates have risen):

• Your fixed rate: 4.0% p.a., 1 year remaining
• Current fixed rates: 6.5% p.a.
• Break cost: $0 (lender benefits from your low rate)

Tip: If break costs are high, wait until your fixed period ends.

Refinancing Strategies for Different Goals

Strategy 1: Rate Shopping (Save Money)

Goal: Lower your interest rate.

Example:

• Current: $550,000 at 6.7% p.a.
• Refinance to: 6.0% p.a.
• Savings: $230/month = $69,000 over 25 years
• Costs: $2,500
• Net benefit: $66,500

Best for: Anyone whose rate is 0.5%+ higher than current market rates.

Strategy 2: Equity Release (Access Capital)

Goal: Access equity for investing, renovations, or debt consolidation.

Example:

• Property value: $900,000
• Current loan: $500,000 (56% LVR)
• Refinance to 80% LVR: $720,000
• Access: $220,000 in equity

Use cases:

• Renovations: $120,000 (increases property value by $150K+)
• Investment property deposit: $100,000 (buy second property)

Best for: Investors, homeowners with significant equity.

Strategy 3: Debt Consolidation

Goal: Combine high-interest debts into low-interest home loan.

Example:

• Home loan: $350,000 at 6.0% p.a.
• Credit cards: $30,000 at 20% p.a. ($6,000/year interest)
• Car loan: $20,000 at 9% p.a. ($1,800/year interest)

Refinance to:

• New home loan: $400,000 at 6.0% p.a.
• Total interest: $24,000/year (vs $24,000 + $6,000 + $1,800 = $31,800)
• Savings: $7,800/year

Best for: People with multiple high-interest debts.

Strategy 4: Feature Upgrade

Goal: Get an offset account, redraw, or other features.

Example:

• Current: Basic variable loan, no offset
• Refinance to: Loan with 100% offset account
• Keep $50,000 in offset
• Saves: $3,000/year in interest (6% of $50K)

Best for: People with savings sitting in low-interest accounts.

Strategy 5: Rate Locking

Goal: Switch from variable to fixed to protect against rate rises.

Example:

• Current: Variable at 6.8% p.a.
• RBA expected to raise rates by 0.5% in next 12 months
• Fix at 6.3% p.a. for 3 years
• If variable rises to 7.5%, you save 1.2% p.a. = $6,000/year on $500K loan

Best for: Risk-averse borrowers who want payment certainty.

Common Refinancing Mistakes to Avoid

1. Chasing Rate Without Checking Fees

A loan with a 5.8% rate but $1,200 in fees may be worse than 5.9% with $0 fees.

Always compare comparison rates.

2. Extending Your Loan Term

Refinancing to a new 30-year term when you have 20 years left means paying interest for 10 extra years.

Example:

• Current: $400,000 loan, 20 years remaining at 6.5% p.a.
• Refinance to: $400,000 over 30 years at 6.0% p.a.
• Monthly payment drops from $2,980 to $2,400 (saves $580/month)
• But total interest paid increases by $120,000 (10 extra years of payments)

Better approach: Refinance to 6.0% but keep 20-year term.

3. Ignoring Break Costs on Fixed Loans

Breaking a fixed loan can cost $5,000-$20,000 if rates have fallen.

Check before refinancing.

4. Refinancing Too Often

Every refinance costs $2,000-$4,000. Refinancing annually rarely makes sense.

Rule of thumb: Only refinance if you'll save 0.5%+ and stay in the loan for 2+ years.

5. Not Using a Broker

Brokers access wholesale rates and deals not available to the public.

Example:

• Direct application: 6.2% p.a.
• Via NIK Finance broker: 5.9% p.a. (wholesale rate)
• Savings: $100/month = $30,000 over 25 years

Final Thoughts

Refinancing is a powerful tool to:

• Save thousands on interest (even 0.5% matters)
• Access equity for investments or renovations
• Consolidate debts and simplify finances
• Upgrade features (offset accounts, redraw)

When to refinance:

• Your rate is 0.5%+ above market
• Your property has increased in value (lower LVR = better rates)
• Your fixed rate is ending and reverting high
• You want to access equity

Use a NIK Finance broker to:

• Compare 100+ lenders in minutes
• Find wholesale rates not available to the public
• Calculate true costs (including fees and break costs)
• Handle paperwork and settlement

The average refinancer saves $3,000-$8,000 per year. Over a 25-year loan, that's $75,000-$200,000 in total savings.