Beginner's Guide to Refinancing for a Lower Rate

Refinancing to a lower rate means switching your existing home loan to one with a lower interest rate, either with your current lender or a new one.

The difference between paying 6.2% and 5.7% on a loan amount of $500,000 works out to roughly $130 per month. Over a year, that's $1,560 staying in your offset account instead of going to the bank. In Baldivis, where the median house price sits at around $710,500, plenty of homeowners are still carrying loans they took out when stock was tight and competition was fierce. If you haven't reviewed your loan in the past 18 months, there's a reasonable chance you're paying more than you need to.

How Refinancing to a Lower Rate Works

You apply for a new loan with different terms, and that loan pays out your existing one. The process involves a property valuation, a credit assessment, and an application review that typically takes two to three weeks from lodgement to approval. Your current lender doesn't need to agree to release you, refinancing is a standard right for any borrower not in default.

Consider a buyer who purchased in Baldivis at the suburb's current median with a 10% deposit and a variable rate of 6.1%. Two years later, their loan balance sits at around $620,000. A broker runs a loan review and finds a lender offering 5.65% with an offset account and no annual fee. The refinance application goes through in three weeks. The new rate drops their monthly repayment by around $190, and the offset account means their savings now reduce the interest charged daily rather than sitting in a separate account earning next to nothing.

When Does Refinancing Make Sense?

Refinancing makes sense when the interest you'll save over the next two to three years outweighs the cost of switching, or when the features you gain, like an offset or redraw, improve your cashflow enough to justify the move.

Most refinances involve discharge fees from your current lender, application fees or valuation costs with the new one, and sometimes settlement fees. These typically add up to between $800 and $1,500. If your rate is half a percent higher than what's currently available and your loan balance is above $400,000, you'll usually recover those costs within the first six months. If you're coming off a fixed rate period and your loan is reverting to a variable rate above 6%, refinancing becomes worth reviewing immediately.

Fixed Rate Refinancing and What Happens When Your Term Ends

If you're still within a fixed rate period, breaking the loan early can trigger break costs. These costs reflect the difference between the rate you locked in and the rate the lender can now lend that money at. If rates have dropped since you fixed, the break cost can be significant. If rates have risen, the break cost may be zero.

Once your fixed term ends, your loan automatically rolls to your lender's variable rate unless you take action. That revert rate is often higher than what new customers are offered. In our experience, borrowers coming off fixed terms in the next few months are frequently rolling onto rates between 6.0% and 6.4%, while new variable loans with offset accounts are being written closer to 5.6% to 5.9%. If your fixed rate is expiring, it's worth starting a loan health check at least six weeks before the end date so you have time to compare options and lodge an application without rushing.

Refinancing While Accessing Equity

If your property has increased in value since you bought it, refinancing lets you access that equity while also moving to a lower rate. The lender bases the new loan on a current valuation, and if your equity position has improved, you can borrow additional funds as part of the refinance.

In a scenario like this, a Baldivis homeowner bought in early 2023 for $650,000 with a 15% deposit. The loan amount was around $552,500. Two years later, the property is valued at $710,000. Their loan balance has come down to $530,000, giving them equity of $180,000. They want to access $50,000 to renovate the kitchen and add a second living area. They refinance to a new lender at a lower rate, the new loan amount becomes $580,000, and their loan-to-value ratio sits at around 82%. The refinance delivers both the equity release and a rate reduction, and because the loan-to-value ratio is still under 90%, no lenders mortgage insurance applies.

What Lenders Look At During a Refinance Application

Lenders assess your income, your current debts, your credit file, and the value of the property. They want to see that you can service the new loan comfortably and that the security, your home, supports the loan amount. The valuation is usually desktop or kerbside rather than a full inspection unless the loan amount or property type requires it.

Your credit file will show any missed payments, defaults, or credit enquiries from the past five years. If you've missed a repayment in the past 12 months, some lenders will decline the application outright, while others will consider it if there's a reasonable explanation and your conduct has been clear since. Your income needs to cover the new loan repayment plus your other commitments, with enough buffer left over to meet the lender's servicing requirements. Most lenders apply a servicing buffer of 3%, meaning they assess your ability to repay at a rate three percentage points higher than the actual rate you'll be paying.

Switching Between Variable and Fixed Rates

Refinancing also lets you change your rate structure. You can move from variable to fixed if you want repayment certainty, or from fixed to variable if your term has ended and you want offset access and flexibility. You can also split the loan, fixing part and leaving part variable.

A split structure might involve fixing 50% of your loan for two years at 5.4% and leaving the other 50% variable at 5.7% with an offset attached. The fixed portion protects half your repayments from rate rises, while the variable portion with offset gives you somewhere to park your savings and reduce interest daily. For someone with irregular income or bonus payments, that offset access can be more valuable than locking in every dollar at a fixed rate. If you're weighing up your refinancing options and aren't sure which structure suits your situation, a broker can model both scenarios using your actual loan balance and repayment capacity.

Refinancing When You're Paying Too Much Interest

If your loan has been running for several years without a rate review, you may be on a rate that's no longer relevant to the current market. Loyalty doesn't get rewarded in home lending. New customers are often offered lower rates than existing ones, and unless you've actively negotiated or refinanced, your rate may have drifted upward while new loan offers improved.

We regularly see this with clients in the southern corridor who took out loans in 2022 or early 2023 and haven't touched them since. The loan works, the repayments get made, but the rate is sitting at 6.3% while comparable loans are now available under 6%. Over the life of a loan, that gap compounds. Even if you're not planning to access equity or change your loan structure, a rate review is worth doing once a year. Call Mel today or book an appointment at a time that works for you.

Frequently Asked Questions