Common Mistakes When Checking if Your Interest Rate is High

Your current interest rate might look high compared to advertised rates, but that doesn't automatically mean refinancing will save you money.

The decision to refinance depends on more than the rate gap. You need to know what your current lender charges to exit, what the new lender charges to set up, and whether the rate difference covers those costs within a reasonable timeframe. Most borrowers who call us are comparing their rate to a headline number they saw online without accounting for the fees or the effort involved in switching.

What Your Current Rate Actually Includes

Your interest rate is one component of what you pay, but the comparison rate shows the true cost. The comparison rate includes the interest rate plus most ongoing fees, calculated over a standard loan amount and term. If your current rate is 6.2% but your comparison rate is 6.5%, you're paying an extra 0.3% in fees each year. A lender advertising 5.9% might have a comparison rate of 6.3% once their application fee, annual fee, and other charges are added. Comparing interest rates without looking at comparison rates can lead you to a product that costs more overall.

How Much the Rate Needs to Drop Before Refinancing Makes Sense

Refinancing usually costs between $1,500 and $3,000 when you add up discharge fees from your current lender, application fees for the new lender, valuation fees, and settlement costs. If you owe $400,000 and you drop your rate by 0.5%, you'll save around $2,000 per year in interest. That means it takes 12 to 18 months just to recover the cost of switching. If you plan to sell or pay off the loan within two years, refinancing to fund a granny flat or reduce your rate might not recover the upfront expense.

In our experience, a rate reduction of at least 0.4% to 0.5% is usually needed to justify the cost and time involved, assuming you'll keep the loan for at least three years.

Fixed Rate Break Costs Can Wipe Out Any Savings

If you're on a fixed rate and want to exit early, your lender will charge break costs based on the difference between your fixed rate and the current wholesale rate. Break costs are unpredictable and can range from a few hundred dollars to tens of thousands, depending on how much rates have moved since you fixed. Consider a borrower who fixed $500,000 at 2.5% three years ago and now wants to refinance. If wholesale rates have risen, the lender has lost the opportunity to re-lend that money at the higher rate, and they'll pass that cost to you. Break costs of $15,000 or more are not unusual in that scenario. Your current lender is required to give you an estimate if you request it, and you should get that number before making any decision.

What Counts as a Competitive Rate Right Now

Competitive variable rates for owner-occupiers with a 20% deposit sit between 5.8% and 6.3%, depending on the lender and loan features. Rates for investors or borrowers with smaller deposits are usually 0.2% to 0.4% higher. If your rate is above 6.5% and you haven't refinanced or negotiated in the past two years, there's a reasonable chance you're paying more than you need to. Lenders don't automatically pass on rate cuts to existing customers at the same level they offer new borrowers, so your rate can drift upward over time without you noticing.

If you're using equity to fund a project like a granny flat, splitting your loan between a fixed portion and a variable portion can give you rate certainty on the construction drawdowns while keeping flexibility on the rest. We regularly see this structure on construction loans for granny flats where the borrower wants to lock in the build cost but keep options open on the main loan.

How to Get a Rate Reduction Without Refinancing

Your current lender would rather drop your rate than lose you to a competitor. Call your lender's retention team and tell them you're comparing rates and considering a switch. Have a specific competitor rate ready to reference. Most lenders will offer a discount of 0.2% to 0.5% to keep you, especially if you have a solid repayment history and reasonable equity. If they won't move, that tells you something about how they value your business, and it's worth following through with a refinance to a lender that does.

Negotiating takes one phone call and costs nothing. Refinancing takes four to six weeks and costs a few thousand dollars. Always try the phone call first.

When a Higher Rate Might Actually Cost You Less

A loan with a slightly higher interest rate but lower fees can cost less over the life of the loan if you're borrowing a smaller amount or planning to pay it off quickly. If you're borrowing $200,000 and one lender charges 6.0% with a $700 annual fee and another charges 6.1% with no annual fee, the second option saves you money after the first year. The same logic applies to offset accounts. A loan with a full offset and a rate 0.1% higher can save you more than a loan with a partial offset and a lower rate, depending on how much you keep in the offset.

If you're using home equity to build a granny flat, the ability to park rental income in an offset account and reduce interest on the whole loan balance is often worth a slightly higher rate.

How Long It Takes to Actually Save Money After Switching

The break-even point is the time it takes for your interest savings to cover the cost of refinancing. If refinancing costs $2,500 and you save $150 per month by switching, you break even after 17 months. Anything you save after that is genuine savings. Most borrowers don't calculate this before refinancing, and some switch lenders every two years chasing rates without ever reaching the break-even point. If you're planning to sell within 18 months, or if your loan balance is small, the effort and cost might not be justified.

Call one of our team or book an appointment at a time that works for you. We'll run the numbers on your current loan, show you what's available, and tell you whether switching makes sense or whether a phone call to your current lender is the smarter move.

Frequently Asked Questions