Your current home loan rate is 5.89%. Another lender is offering 5.59%. That's a difference of just 0.3 percentage points. Is it really worth refinancing?
It's a question I hear when homeowners start reviewing their mortgages.
At first glance, 0.3% doesn't sound like much. You might assume the saving is too small to justify changing lenders.
Or you might see a lower rate and decide it's time to move immediately.
I wouldn't make either decision based on the interest rate alone.
The rate difference is only the beginning of the calculation.
A small reduction on a large mortgage can save thousands of dollars over time. But refinancing can also involve costs, changed loan features and a longer repayment period.
When I review a refinancing opportunity, I want to understand whether the borrower will actually be better off after considering those factors.
Refinancing for a 0.3 percentage point lower rate can be worthwhile. The important question is whether the savings outweigh the switching costs and any disadvantages of the new loan.
The Question You Should Ask Instead
Let's use a hypothetical example.
You have a $650,000 mortgage and discover that another lender is offering an interest rate 0.3 percentage points below your current rate.
Naturally, you ask: "Is it worth changing banks for such a small difference?"
My suggestion is to start with a different question:
Before comparing lenders, I would want to understand a few things about your existing mortgage.
How much do you owe? How many years remain? Is the loan fixed or variable? Do you have an offset account? What will the new lender charge?
And importantly, do you expect to keep the property and the loan for several years, or are you planning to sell or make another property purchase?
These details can completely change the outcome.
A 0.3% reduction may be worth pursuing for one borrower and not another.
How Much Does a 0.3% Rate Reduction Actually Save?
The dollar value of a rate reduction depends heavily on your outstanding loan balance.
As a quick approximation, multiplying your balance by 0.003 gives the annual interest difference at that balance, before allowing for principal repayments or other changes.
| Loan Balance | Approximate Annualised Interest Difference* |
|---|---|
| $300,000 | $900 |
| $500,000 | $1,500 |
| $650,000 | $1,950 |
| $800,000 | $2,400 |
| $1,000,000 | $3,000 |
*These figures are simple annualised estimates using a constant balance. Actual savings will differ because mortgage balances change, interest is generally calculated daily, and repayment schedules and offset balances affect the result.
On a $650,000 mortgage, the initial annualised interest difference is approximately $1,950.
That is not insignificant.
But it doesn't mean you will automatically save exactly $1,950 during the first year, or that the same saving will continue every year.
I would look at the actual repayment schedules to understand the benefit.
Should you reduce your repayments or keep paying the same amount?
This is another question worth considering during a refinance. If your interest rate falls, you may be able to reduce your minimum monthly repayment. That could help your household cash flow.
Alternatively, you may decide to maintain your existing repayment amount.
If you continue paying the same amount while the interest rate is lower, more of each repayment may reduce the principal balance. That could help you repay the mortgage sooner, assuming the rate advantage continues and your loan permits the additional repayments.
I would compare both options rather than automatically selecting the lowest monthly repayment.
The Break-Even Point: When Does Refinancing Pay for Itself?
One of the first calculations I like to examine is the break-even point.
Refinancing can involve upfront costs.
The break-even point estimates how long it will take for the savings from the new loan to recover those costs.
A Simple $650,000 Example
Let's assume:
- Current loan balance: $650,000
- Current interest rate: 5.89%
- Proposed interest rate: 5.59%
- Rate reduction: 0.30 percentage points
- Estimated switching costs: $1,200
The initial annualised interest difference is approximately:
$650,000 × 0.003 = $1,950
That is equivalent to about $162.50 per month using a simple constant-balance estimate.
Dividing the $1,200 switching cost by $162.50 gives a simple break-even estimate of approximately 7.4 months.
So, on these assumptions, the switching costs could be recovered in roughly eight months.
However, I would treat that as an initial estimate, not the final decision.
An accurate comparison should model the declining loan balance, repayment schedule, ongoing fees and the timing of savings.
What if you plan to sell soon?
Now imagine you expect to sell the property in six months.
Even if the new lender offers a lower rate, you may not hold the loan long enough to recover the costs.
That changes the decision.
A refinance that makes sense over three years may not make sense over six months.
My approach is to compare the expected savings over the period you realistically intend to keep the loan.
What Does It Cost to Refinance a Home Loan?
Before comparing the savings, I would want to know what the refinance will actually cost.
Even where a lender advertises a fee-free application, other expenses may apply.
- Discharge fees: charged by your existing lender to release its mortgage.
- Government registration fees: associated with discharging and registering mortgages.
- Valuation fees: where applicable.
- Application or establishment fees: depending on the new product.
- Package or annual fees: which may change the ongoing cost comparison.
- Fixed-rate break costs: potentially significant if you exit a fixed loan early.
- Lenders mortgage insurance: which may become relevant depending on the new LVR and lender requirements.
Some lenders may offer incentives or absorb certain costs.
But I would still compare the full loan conditions rather than relying on a promotion.
Ask for the complete cost of switching, including ongoing fees. A slightly lower interest rate may not provide the saving you expect if the new loan has higher fees.
The 30-Year Trap: When a Lower Rate Can Still Cost More
This is one of the most important points I would raise during a refinancing discussion.
Let's say you originally took out a 30-year mortgage.
You have been making repayments for eight years and now have 22 years remaining.
You refinance to a new lender and choose another 30-year term.
Your minimum monthly repayment may fall substantially.
That looks attractive.
But part of the reduction comes from spreading your remaining debt over an additional eight years.
You may end up paying interest for much longer.
Even with a lower rate, your total interest cost over the extended term could be higher.
The comparison I would make
First, compare the proposed refinance over the same remaining term as your existing loan.
If you have 22 years left, compare the new rate over 22 years rather than automatically restarting at 30 years.
Then, if you are considering a longer term for cash-flow reasons, model that separately.
This allows you to see whether the benefit comes from the lower rate or simply from extending the debt.
What Are You Giving Up for the Lower Rate?
Two home loans with different interest rates are not necessarily equivalent.
Before changing lenders, I would compare the features you currently use with those offered by the new loan.
For example:
- Does the new loan offer a full offset account?
- Is redraw available?
- Can you make unlimited extra repayments?
- Does it allow multiple loan splits?
- Are there annual package fees?
- Is the rate variable or fixed?
- Are there restrictions on changing the loan later?
If you keep substantial savings in an offset account, that feature may be particularly valuable.
If you have multiple investment loan splits, you may need a lender that supports the existing structure.
I wouldn't suggest paying for features you don't need.
But I also wouldn't give up a useful feature simply because another lender advertises a slightly lower rate.
Could Your Offset Account Change the Calculation?
Absolutely.
If you keep money in an eligible offset account, the interest saving from a rate reduction may be different from what you expect.
Suppose you have:
- A $650,000 mortgage
- $150,000 in a 100% offset account
If the full offset applies, interest is generally calculated on an effective balance of $500,000 while that offset balance is maintained.
A 0.3 percentage point reduction on that amount represents an initial annualised interest difference of approximately $1,500 rather than $1,950.
The calculation changes as your offset balance changes.
I would also check whether the new lender charges an annual fee for offset access.
This is a good example of why two borrowers with the same mortgage balance may receive different benefits from refinancing.
What if Your Current Home Loan Is Fixed?
If you have a fixed-rate home loan, the first thing I would want to establish is whether a break cost applies. Refinancing before the fixed period expires may trigger costs under your existing loan contract. These can vary depending on the lender's calculation, the remaining fixed period, interest rate movements and the loan terms.
A small rate reduction may not justify a substantial break cost.
For example, if the estimated annual saving is $1,500 but the break cost is $6,000, it could take years to recover that cost. In that situation, I would compare the benefit of refinancing now with waiting until the fixed period ends. Ask your existing lender for a current break-cost quote before making a decision.
Could Your Property Value Affect the Refinance?
Yes. Your loan-to-value ratio, or LVR, can affect which products and rates are available. LVR compares your loan amount with the property's value accepted by the lender.
For example, a $650,000 loan against a property valued at $900,000 has an LVR of approximately 72.2%.
But if the lender values the same property at $780,000, the LVR rises to approximately 83.3%.
That could change the available products, pricing or lenders mortgage insurance requirements. Some eligible professionals may have access to different LMI policies, subject to lender criteria.
When reviewing a refinance, I would therefore consider the lender's likely valuation and the resulting LVR.
It isn't enough to assume the property will be valued at the price you believe it could sell for.
Will You Automatically Qualify for the Lower Rate?
Not necessarily.
Refinancing generally involves a new credit application. The proposed lender may review your income, living expenses, existing liabilities, credit history and property security. It may also apply a serviceability buffer when assessing your ability to repay the new loan.
You might have obtained your original mortgage several years ago, when your circumstances were different.
Since then, you may have:
- Higher household expenses.
- Additional dependants.
- A car loan or personal loan.
- Reduced working hours.
- Different employment arrangements.
- Changes to your credit history.
Even if you have never missed a mortgage repayment, you may not satisfy every lender's current assessment.
That's why I prefer to understand your borrowing capacity and the relevant lender policy before submitting applications.
If you're concerned about credit enquiries, read our guide to how home loan applications affect your credit score .
Is Refinancing for 0.3% Different for Investment Properties?
The basic savings calculation is similar, but investment loans can involve additional considerations. You may have multiple loan splits, different securities or funds previously redrawn for particular purposes.
Changing lenders or combining loan accounts can have consequences that are not obvious from the interest rate. The purpose and use of borrowed funds are relevant to interest deductibility.
For that reason, I wouldn't automatically combine private and investment borrowings simply because a new lender offers a lower rate.
You need to understand the credit structure, and a registered tax agent should review any tax implications.
For broader background, read our guide to how negative gearing works in Australia.
At Triple O Finance, we can assist with credit structure and lender comparisons. We do not provide tax or investment advice.
Why Refinancing Can Be Different for Police, Nurses and Other Professionals
This is an area I pay particular attention to.
Many of the professionals we work with earn more than a fixed base salary.
Police officers, nurses, paramedics, firefighters, doctors and other professionals may receive overtime, shift penalties and various allowances.
These income components are not always assessed the same way by lenders.
Consider a hypothetical nurse earning:
- $95,000 base salary
- $18,000 regular shift penalties
- $12,000 regular overtime
Their total annual employment income is $125,000.
But a lender may not necessarily use the full amount when assessing the mortgage.
Different lenders may apply different percentages or verification requirements to variable income.
That can materially affect the refinancing assessment.
For borrowers with regular overtime or shift allowances, my approach is to compare how relevant lenders assess that income before focusing solely on their rates.
The lowest advertised rate is not necessarily the most suitable available loan.
When Might Staying With Your Current Lender Make More Sense?
I don't believe every refinancing review needs to end with a change of lender.
There are circumstances where staying may be worth considering.
- The switching costs would take too long to recover.
- You expect to sell or repay the loan soon.
- Your existing fixed loan has significant break costs.
- You would lose important features or flexibility.
- You may not satisfy the proposed lender's credit requirements.
- Your existing lender is willing to offer competitive pricing.
Have you asked your current lender for a better rate?
Before refinancing, I would also consider whether your existing lender can improve your rate. Some lenders may offer a retention discount, depending on their policy and your loan.
If you can obtain similar pricing without switching costs or a new application, that could change the comparison.
A retention discount isn't guaranteed, but it's worth considering as part of the review.
When Could Refinancing for 0.3% Be Worthwhile?
Refinancing may be worth considering where:
- The outstanding loan balance is substantial.
- The switching costs are relatively low.
- The expected holding period is long enough to recover the costs.
- The new loan retains the features you need.
- The loan term is not unnecessarily extended.
- You satisfy the new lender's credit requirements.
- The new arrangement produces a meaningful net financial benefit.
The rate reduction doesn't need to be dramatic. On a large mortgage, a relatively small improvement can make a difference.
But I would want to demonstrate that benefit through a proper comparison, rather than assume it from the advertised rate.
Seven Questions to Answer Before Refinancing
- 1. What is my current loan balance? The balance affects the dollar value of the rate reduction.
- 2. How many years remain? Compare the new loan over the same remaining term before considering an extension.
- 3. What will refinancing cost? Include discharge, registration, establishment, valuation and other applicable fees.
- 4. How quickly will the savings recover the costs? Calculate a realistic break-even period.
- 5. What features will I gain or lose? Consider offset, redraw, loan splits and repayment flexibility.
- 6. Will I qualify for the new loan? Review income, expenses, liabilities and lender serviceability requirements.
- 7. Can my existing lender improve the rate? A retention offer may provide an alternative to switching.
How Triple O Finance Can Help
When reviewing a refinance, I look beyond the headline interest rate.
The aim is to understand whether the new loan arrangement offers a meaningful benefit after considering costs, features and the borrower's circumstances.
At Triple O Finance, we can help you review:
- Your existing loan and repayment structure.
- Available lender pricing.
- Estimated switching costs.
- Break-even calculations.
- Loan term comparisons.
- Offset and redraw requirements.
- Borrowing capacity and income assessment.
- Relevant professional lending policies.
We can also explain the credit requirements of relevant lenders before an application is submitted.
Could a 0.3% Rate Reduction Make a Difference to Your Mortgage?
Before changing lenders, find out what the rate difference means in actual dollars, what switching may cost and whether the new loan fits your circumstances.
We can review your existing mortgage and compare relevant lending options.
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