Refinancing Myths: When It Actually Costs You More

Refinancing is sold as an easy win: find a lower rate, switch, pocket the difference. Sometimes it is exactly that. Other times the fees, a longer loan term or a debt quietly rolled into the mortgage mean the borrower ends up paying more. With the Reserve Bank's cash rate at 4.60% after its increase effective 30 September 2026, plenty of households are checking whether to switch. This guide works through the most common refinancing myths, the costs to count, and a simple way to test whether a switch actually leaves you ahead.

What does refinancing actually involve?

Refinancing means replacing your current home loan with a new one, either with a different lender (an external refinance) or with a different product at your current lender (an internal switch). The new lender pays out the old loan, registers its own mortgage over the property, and you start repaying the new loan.

That process has costs on both sides, and the new lender has to assess you again from scratch. Both points sit behind most of the myths below.

Myth 1: Does a lower rate always save you money?

Not on its own. A lower rate saves money only after it has recovered the cost of switching, and only if you keep the loan long enough to get there. The tool for this is the break-even period: total switching costs divided by the monthly saving.

Take an illustrative loan with $500,000 owing, 25 years left, at 6.5%. Repayments are about $3,376 a month. Refinancing to 6.0% over the same 25 years cuts that to about $3,222, a saving of roughly $155 a month. If the switch costs $3,000 in fees, break-even is about 20 months. Sell or refinance again before then and the switch cost money. These rates are examples, not quotes.

ASIC's Moneysmart notes there can be a difference of more than 2% between variable rates on the market, so the gain can also be much larger than this example. The point is to run the numbers rather than assume. Moneysmart's own case study on its switching home loans page (updated July 2026) shows a couple recovering their switching costs in five months, because the rate gap was large and the fees small.

Myth 2: Are refinancing costs small enough to ignore?

Sometimes, but not reliably. Moneysmart lists the fees to compare before switching, and one of them, a fixed-rate break cost, can be substantial.

LMI is the one that most often turns a good deal bad. Moneysmart warns that if you have less than 20% equity, paying LMI again can outweigh the savings from a lower rate. LMI explained covers how it works.

Myth 3: Do you have to leave your lender to get a better rate?

No. Moneysmart's first step is to tell your current lender you plan to switch to a cheaper loan elsewhere, because it may cut your rate to keep you. Having at least 20% equity and a good credit history strengthens that conversation. A lower rate from your existing lender usually avoids most of the costs in the table above, so it is worth asking before you apply anywhere else.

Myth 4: Do lower repayments mean you are saving money?

This is the costliest myth. When a new loan starts, the default term is often 30 years, even if you only had 25 left. The repayment drops, which feels like a saving, but you pay interest for five more years.

Using the same illustrative loan, refinancing to 6.0% over a fresh 30-year term drops repayments to about $2,998 a month, around $378 less than now. Total interest over the life of the loan, though, rises to about $579,000, compared with about $513,000 by staying put and about $466,000 by switching to 6.0% while keeping the 25-year term. The lower rate plus the longer term costs roughly $66,000 more than not refinancing at all. Moneysmart's advice is to be firm on the loan length and negotiate a term similar to what you have left.

Myth 5: Is rolling debts or cash-out into your mortgage free money?

Consolidating a car loan or credit card into the mortgage swaps a higher rate for a lower one, but stretches the debt over decades. An illustrative $20,000 car loan at 9% over five years costs about $415 a month and roughly $4,900 in interest. Added to a mortgage at 6% over 25 years, the repayment falls to about $129 a month, but the interest rises to roughly $18,700.

The lower monthly figure only becomes a real saving if you keep paying the old amount, so the extra debt is cleared quickly. If you are weighing which debts to tackle first, debt snowball vs avalanche compares the two main approaches.

Myth 6: Can anyone refinance whenever they like?

Only if a new lender approves the loan. Refinancing is a fresh credit application: the new lender must meet its responsible lending obligations, verify your income and expenses again, and test repayments at your rate plus APRA's serviceability buffer, which APRA confirmed on 28 May 2026 remains at 3 percentage points. If rates, your income or your debts have moved against you since you borrowed, you may not qualify for the same amount. How banks assess your income explains what that reassessment looks at, and how to increase your borrowing power covers the levers you control.

One specific trap: if you bought with the Australian Government 5% Deposit Scheme, Housing Australia's Information Guide (1 July 2026) says the guarantee ends if you refinance with a lender that is not a Participating Lender. If your loan is still above 80% of the property value, the new lender may then require LMI.

How do you check whether refinancing will save you money?

1. Find your current position. Note the balance, rate, years remaining and whether any part is fixed.
2. Ask your current lender for a better rate. Get any offer in writing.
3. Get written quotes for every cost. Break costs, discharge fee, new application and settlement fees, any valuation or legal costs, and any LMI.
4. Compare at the same loan term. Calculate repayments for the new loan over the years you have left, not a fresh 30 years.
5. Work out the break-even period. Total costs divided by monthly savings. Compare it with how long you expect to keep the loan.
6. Check features you rely on. Offset accounts, redraw and repayment flexibility can be worth more than a small rate difference.
7. Use a calculator. Moneysmart's mortgage switching calculator shows the saving and how long it takes to recover the costs.

For a second look at the maths, NewGen Finance Brokers' refinance break-even guide sets out the same formula and which costs to include (NewGen is TodayForge's sister business; an enquiry is free and doesn't commit you to a loan).

When does refinancing usually make sense?

A switch tends to stack up when the rate gap is meaningful, the costs are known and modest, there is no large break cost or new LMI, you keep the remaining term the same or shorter, and you expect to hold the loan well beyond the break-even point. It also helps when a fixed rate is about to roll onto a higher variable rate, because break costs no longer apply at expiry. It tends not to stack up when the main appeal is a lower repayment created by extending the term or absorbing other debts.