Refinancing for Loan Flexibility: What to Know

Refinancing can give you a loan that fits your life better, even when the interest rate is not the main reason you are looking. If your current loan feels rigid, a refinance could swap it for one with features that suit how you actually manage money.

If you live in Salisbury North, you might be wondering whether it is worth the effort. This guide walks you through it slowly, in plain words, so you can decide with confidence.

What Does It Mean to Refinance a Home Loan for Flexibility?

To refinance a home loan is to replace your current loan with a new one, either with a different lender or your existing lender. Doing it for flexibility means you are choosing the new loan for its features, such as an offset account, redraw or the ability to switch between rate types, rather than only chasing a lower rate.

Moneysmart calls staying with your current lender but moving to a different loan an internal refinance. Both paths are valid, and a broker can compare them for you.

Which Loan Features Make a Loan More Flexible?

The features that most often add flexibility are an offset account, redraw access, the option to make extra repayments, and the choice between a variable interest rate and a fixed interest rate or a split of both.

An offset account is a transaction account linked to your loan. The money sitting in it is subtracted from your loan balance when interest is worked out, so you pay interest on less. Redraw lets you pull back extra repayments you have made. Each has a trade-off. Offset accounts can come with a higher rate or an annual package fee depending on the lender, and redraw access can have limits or fees depending on the lender. Our page on choosing the right loan features explains these in more detail.

If you are coming off a fixed rate, the end of that period is a natural time to look at features. Our fixed rate expiry page covers what usually happens when the term ends.

How Do You Know If Refinancing Is Worth It?

A refinance is worth it when the benefits of the new loan are bigger than the cost of moving. Those costs can include a discharge fee on your old loan, an application fee on the new one, and a break fee if you leave a fixed rate early.

Moneysmart lists these costs, and a lender or broker can confirm the exact amounts for your loan. Fees are set by each lender, so they differ. If you pay lenders mortgage insurance because you have less than 20 per cent equity, switching can add to the cost, and Moneysmart notes you can ask about a refund of some of the insurance on your current loan.

A good first step is a loan health check. It shows what your current loan includes, what it costs, and what is on offer elsewhere.

Example: Adding an Offset Account Without Chasing a Lower Rate

Consider a homeowner in Salisbury North with a variable loan that has no offset and no redraw. They keep a few months of pay in a separate savings account, and the interest on that account is lower than the interest on the loan.

They ask a broker to compare options. The broker finds a loan with a full offset account. The illustrative rate is 6.75% p.a., the same as their current loan, so the benefit is not a rate cut. The offset account is the point.

Here is the maths using that illustrative rate. If they keep $20,000 in the offset, interest is only worked out on the balance after that $20,000 is taken off. At 6.75% p.a., $20,000 is about $1,350 of interest a year they would not pay on the loan. That is an illustration only, and the saving depends on their balance staying in the account. The new loan charges an annual package fee, so the broker subtracts that fee from the saving to see if the switch is worth it. In this scenario the saving is larger than the fee, plus the discharge and application costs spread over time, so they go ahead.

The outcome is a loan that works harder for the cash they already hold, and money that stays available to spend whenever they need it.

What Does the Refinance Process Involve?

The refinance process usually involves comparing loans, applying, having the lender assess your finances, and then settling the switch while your old lender is paid out.

Under Australian law, a broker or lender must ask about your needs and finances and check that the loan is suitable. ASIC guidance says a broker must also consider whether the costs of switching outweigh the savings. That means a broker can advise you to stay put if moving does not make sense.

Lenders also check you could still afford repayments at a rate well above the loan rate. APRA has confirmed this buffer remains at 3 percentage points for new borrowers. If your circumstances have changed since you took out the loan, such as a lower income or less equity, tell your broker early so they can pick lenders that suit your situation.

A property valuation can help you see what your home may be worth, which affects how much equity you hold and the options open to you.

Can You Refinance and Borrow More at the Same Time?

You may be able to refinance and borrow more if a lender approves it. The lender must assess that you can afford the larger loan, and a higher loan-to-value ratio can mean lenders mortgage insurance. The extra amount is new debt that adds to your repayments and interest. Borrowing extra to release equity is a different goal from a like-for-like refinance.

If you want to use equity for something specific, such as renovations, our equity release loans page explains how it works. If you borrow for an investment property, the tax treatment depends on what the money is used for, so speak to your accountant before you act.

If you took out your loan through the Australian Government 5% Deposit Scheme, check before you move. Housing Australia says you can only keep the scheme benefit if you refinance with another participating lender without increasing the loan or extending the term.

If you are weighing up a switch, our home loan refinancing page is a good place to read further.

Call one of our team or book an appointment at a time that works for you. We will go through your loan with you, explain each option in plain words, and tell you honestly if staying where you are is the right call.

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