Refinancing a Loan: Advantages, Costs and How to Compare

Refinancing a loan means replacing your existing mortgage with a new one — typically with a different lender — in order to obtain more favourable rates, a shorter loan term, or better overall conditions. Written by Mary Nebotakis, Managing Director of Natloans (B. Eco, Dip. Financial Services), this article was first published in February 2020 and last updated in September 2025. It is general information only; confirm current costs, conditions and eligibility for your own circumstances with Natloans before making any decisions.

What Is Refinancing a Loan?

In straightforward terms, refinancing is the practice of swapping your current mortgage for another one that offers more desirable rates, a different length, or improved terms. Depending on the changes made, refinancing may allow a borrower to shorten the life of their loan significantly or reduce the total interest paid over time.

While the concept is simple, the decision itself is significant and — as the article notes — should only be embarked on after very careful consideration of both the potential benefits and the real costs involved.

How Does Refinancing Work?

When you refinance, your new lender pays off the outstanding balance owed to your original lender. You then repay a new loan to the new lender, ideally on terms that are more advantageous than before. The mechanics of the transaction are relatively straightforward; the complexity lies in evaluating whether the switch genuinely works in your favour once all associated costs are accounted for.

The Advantages of Refinancing

The article identifies two distinct advantages, each corresponding to a different type of change you might make to your mortgage:

1. Shortening Your Loan Term

If you move to a repayment plan with a shorter timeframe — for example, switching from a 20-year term to a 10-year term — you could become debt-free and own your home outright in half the time. For borrowers whose primary goal is to clear their mortgage sooner, this can be a compelling reason to refinance, even if the monthly repayments increase.

2. Securing a Lower Interest Rate

If you move to a loan with a lower interest rate, you pay less interest on the same property over the same period. The article notes this could mean saving potentially tens or hundreds of thousands of dollars across the life of the loan. This figure is illustrative of the general principle; actual savings depend entirely on your loan balance, the rate difference, your remaining term and any costs incurred in switching. Confirm what any saving might look like in your specific situation with Natloans.

Summary: Two Main Refinancing Advantages
Type of Change Potential Benefit Key Consideration
Shorter loan term Own your home sooner; less time in debt Monthly repayments may be higher
Lower interest rate Reduced total interest paid over the life of the loan Switching costs must not outweigh the saving

The Disadvantages of Refinancing

The article is clear that refinancing carries a significant potential drawback: the costs involved. These costs can, in some circumstances, undermine the very benefits you are seeking to achieve.

Upfront Loan Costs

Application, establishment, valuation or settlement charges may apply to a replacement loan, but not every product charges every fee. Obtain an itemised quote rather than assume a universal fee. Also check ongoing fees, discharge costs, applicable government charges and any lenders mortgage insurance required.

Exit or Break Costs from Your Current Lender

A fixed-rate loan may have a break cost if the fixed arrangement ends early. This is different from discharge or administrative fees. A break cost does not apply simply because a variable-rate mortgage is refinanced before its full loan term ends. Ask the existing lender for the payout and charges applicable on the intended settlement date; amounts can change.

The Importance of Knowing Your Break Cost

The article specifically highlights that understanding your current loan's break cost is an important early step. At certain points in a loan cycle, the cost of breaking from one lender and switching to another can be so great that it negates the advantages of refinancing altogether. The practical guidance offered is direct: do your research before proceeding.

Key Decision Factors Before Refinancing

Based on the article's guidance, the following factors are worth examining before deciding to refinance:

  • Your primary goal: Are you trying to reduce your monthly outgoings, pay off your loan faster, or both? The type of refinancing that suits you depends on this answer.
  • Your current loan's break cost: Request this figure from your existing lender before proceeding. It is a critical number in any cost-benefit calculation.
  • New loan establishment fees: Factor in all upfront costs associated with the replacement loan.
  • The net benefit: Only after accounting for all costs — exit fees, new loan fees and any other charges — can you determine whether refinancing genuinely improves your position.
  • Time remaining on your loan: The further through your loan you are, the less interest you have left to save, which can affect whether a rate reduction justifies the cost of switching.

These are general considerations drawn from the article. Your individual circumstances will determine what applies to you. Speak with Natloans for guidance specific to your situation.

Questions and Answers

What does refinancing a loan actually mean?

Refinancing means replacing your existing mortgage with a new loan — usually from a different lender — that offers improved rates, a shorter term, or better conditions overall.
Source: natloans.com.au

How does the refinancing process work mechanically?

Your new lender pays off the remaining balance owed to your old lender. You then repay the new lender under the revised terms agreed at the time of refinancing.
Source: natloans.com.au

What are the two main advantages of refinancing?

The article identifies two: shortening your loan term so you become debt-free sooner, and securing a lower interest rate so you pay less interest over the life of the loan.
Source: natloans.com.au

What is the main disadvantage of refinancing?

The primary disadvantage is cost. Fees associated with establishing a new loan, combined with any exit or break costs charged by your existing lender, can be significant and may outweigh the financial benefits of switching.
Source: natloans.com.au

What is a break cost and why does it matter?

A break cost can arise when a fixed-rate arrangement ends before its fixed period expires. It is distinct from discharge or administrative charges and should not be described as a penalty on every mortgage repaid before its overall term ends. Request a current written calculation and compare it with the realistic savings from switching.

Does refinancing always save money?

Not necessarily. While a lower rate or shorter term can reduce costs, the fees involved in switching — including break costs and new loan establishment fees — must be weighed against any projected saving. The article's guidance is to research thoroughly before making a decision.
Source: natloans.com.au

Is refinancing only about getting a lower rate?

No. While a lower interest rate is one common motivation, refinancing can also be pursued to shorten the loan term and become mortgage-free sooner, even if the rate remains similar.
Source: natloans.com.au

Is this article a current eligibility assessment or quote?

No. This article was first published on 7 February 2020 and provides general information only. It does not constitute a quote, approval or eligibility assessment. Confirm current rates, costs and conditions applicable to your circumstances directly with Natloans.
Source: natloans.com.au

Who wrote this article?

The article is authored by Mary Nebotakis, Managing Director of Natloans, holding qualifications of B. Eco and Dip. Financial Services.
Source: natloans.com.au

Where can I read related Natloans articles?

Two related articles are linked from the original page:

Next Steps

If you are considering refinancing your home loan, the article's core advice is to approach the decision carefully and with full awareness of the costs involved. A useful starting point is to:

  1. Contact your current lender to obtain your loan's break cost in writing.
  2. Identify what fees a new lender would charge to establish the replacement loan.
  3. Compare the total cost of switching against the projected benefit over your remaining loan term.
  4. Speak with Natloans to discuss your individual circumstances and whether refinancing is appropriate for you.

Natloans can be contacted via their website at natloans.com.au.

Source Reference

This page is based on the Natloans public article: Refinancing A Loan: What Are The Advantages?, authored by Mary Nebotakis, Managing Director, Natloans. Originally published 7 February 2020; last modified 3 September 2025 (as recorded at retrieval). Content reflects the article as published and does not constitute current financial advice. Rates, costs and conditions should be confirmed with Natloans before relying on them.

Corrections and a fair comparison

The original article says refinancing leaves a “new, lower sum of debt”. Refinancing does not by itself reduce the outstanding principal: the new borrowing pays the old balance and may also include financed fees or extra borrowing. A lower interest rate is not debt forgiveness. Compare the payout figure, new principal, repayments, fees and total interest separately.

The original 20-year-to-10-year example describes a chosen repayment term, not an automatic halving of debt or a guaranteed refinance outcome. A shorter term commonly requires higher repayments, and existing-loan extra repayments may be another option. Conversely, resetting a mortgage to a longer term can lower monthly payments while increasing total interest.

Use the same remaining term and comparable features when testing rates. A simple break-even estimate is switching costs divided by monthly net savings, but it is only a screening measure: changing rates, fees, balances and time held can change the result. Ask the existing lender for a better deal as well as comparing alternatives.

Primary guidance reviewed 15 October 2026: ASIC Moneysmart — switching home loans. The original was published 7 February 2020 and modified 3 September 2025; its fee and principal descriptions above have been corrected rather than treated as current rules.

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