Refinancing often starts with a headline rate that looks sharper than what you pay now. On its own, that number does not tell you whether the move will put you in a better position. To judge any refinance offer, you need to understand how lenders build that rate, what the comparison rate really means, and how features and fees change your cost over time.
How Lenders Build A Refinance Rate Behind The Scenes
Every home refinance rate starts with the lender cost of funds. On top of that, the lender adds a margin for operating costs, expected credit losses and profit, then adjusts for the loan type and the risk they see in your profile. Refinance products that look similar from the outside can still differ by 0.30% or more.
Lenders use risk based pricing. Your loan to value ratio, income, expenses, other debts and credit history all influence how much margin they add. An owner occupier with a low LVR, stable income and a clean repayment record will usually see sharper refinance rates than an investor with higher leverage or a patchy credit file. If your situation has improved since you took out your original loan, a refinance can capture that improvement. If your position has weakened, quotes may come in higher than you expect.
The structure you choose also changes the rate. In broad terms you usually choose between:
- Variable rate refinance products that move with the market and usually offer more flexibility
- Fixed rate refinance products that trade flexibility for repayment certainty over a set period
- Split loans that place part of the balance on a fixed rate and leave the rest variable
Owner occupier principal and interest loans usually attract the lowest refinance rates. Investor loans and interest only structures usually sit higher because the lender expects more risk and slower debt repayment. Specialist lenders such as Empower Money may also price differently where they offer tailored structures, including 105% home loan options through Power Up Elite for eligible borrowers who need to cover more than the purchase price.
Using Comparison Rates As A Filter Not The Final Answer
Australian lenders must show a comparison rate whenever they advertise a home loan. The rule exists to stop offers that hide high fees behind a low interest rate. Used well, comparison rates help you filter the market.
What Australian Lenders Include In A Comparison Rate
A comparison rate combines the interest rate with most unavoidable fees and expresses everything as a single percentage. It usually assumes a 150,000 dollar loan over 25 years on principal and interest repayments. Included items normally cover application fees, settlement or legal fees, ongoing account fees and discharge fees.
Because the assumptions are standard, comparison rates help you rule out obviously expensive products. If you see a refinance special at 5.45% with a comparison rate above 7%, you know that the low headline rate probably comes with high package fees or a sharp revert rate. If 2 products have similar interest rates but very different comparison rates, the product with the higher comparison rate usually has higher built in fees.
Costs And Risks Comparison Rates Still Miss
Comparison rates do not show every cost. They leave out government charges, lenders mortgage insurance, break costs on fixed terms and late fees. They also assume you keep the same loan for the full 25 year notional term.
In practice many borrowers refinance again after 3 to 5 years or sell the property and pay out the loan. If you do not expect to keep the loan for decades, you need to model your own time frame and pay more attention to upfront costs than the standard comparison rate suggests.
Comparison rates also ignore how you use flexible features. Offset accounts, redraw and extra repayments all reduce your real interest cost if you use them well. A loan with a slightly higher comparison rate but a genuine offset account can still leave you ahead of a very bare product with a slightly lower rate.
Reading Lender Examples Without Falling For Marketing
When you look at real lender rate sheets, focus on 3 numbers together. Check the advertised rate, the comparison rate and the revert rate for any discounts or fixed periods. If a lender offers a refinance rate that looks unusually low, ask what happens after any introductory period. A sharp discount for 2 years can revert to a much higher ongoing rate.
It also helps to compare across different types of lenders. Major banks, customer owned institutions, digital lenders and specialist providers such as Empower Money all balance rates, fees and features in different ways. A slightly higher rate from a lender with lower ongoing fees, clearer policy on products like 105% home loans and strong digital service can still be the more practical choice.
Features That Change The True Cost Even When Rates Look Similar
Traps That Quietly Erase Your Refinance Savings
Not every refinance improves your position. Some offers deliver short term relief while setting you up for higher costs later.
Short term introductory discounts can look compelling when you compare only the first year. The danger comes when the loan rolls to a much higher revert rate and you do not refinance again in time. Always calculate your average rate over the period you expect to keep the loan, not just during any discount.
Fixed rate refinance deals can also hide risk. If you need to sell, refinance again or repay a large part of the loan early, break costs can be significant. Discharge fees, settlement fees and other exit charges can also erode the benefit of a small rate reduction.
Refinance cashbacks are another common trap. Several 1,000 dollars upfront is attractive. The problem is that cashback offers often come with higher ongoing rates or stricter conditions. Over 3 to 5 years, that higher rate can easily outweigh the initial payment.
A Simple Framework To Test Any Refinance Offer
You do not need a complex model to confirm whether a refinance works for you. A straightforward process will keep you focused on the numbers that matter.
Start with your current loan. Note your interest rate, remaining term, monthly repayment, ongoing fees and any package costs. Then estimate how long you realistically expect to keep the property and the loan. This gives you a clear baseline so you can see what happens if you change nothing.
Next, take your shortlist of refinance offers and model outcomes for time frames such as 3 and 5 years. For each lender, include:
- Interest costs at the advertised rate and any revert rate you expect
- Upfront, ongoing and exit fees over your chosen horizon
- The effect of any offsets, extra repayments or cashbacks you will genuinely use
Even a simple spreadsheet or online calculator will show you which options deliver stronger outcomes once you include real life behaviour. Finally, stress test the plan. Check what happens if rates rise by 1 to 2%, if you stop extra repayments for a while or if you need to sell earlier than planned. If a refinance only works in a best case scenario, treat that as a warning. The best refinance choice is usually the choice that still leaves you ahead under less favourable conditions.
