The Benefits and Risks of Extending Your Loan Term to Lower Payments

With interest rates on the rise, many Australian homeowners and property investors are asking the same question: is refinancing still worth it?

For years, refinancing has been a go-to strategy for cutting home loan costs, accessing better features, or consolidating debt — but in today’s higher-rate landscape, the decision has become more complex. While refinancing can still deliver meaningful benefits, it now requires sharper analysis and more strategic thinking.

In this guide, we’ll break down the pros and cons of refinancing in a rising rate environment, explore key factors to consider, and provide practical tips to help you make an informed decision.

Understanding the Current Interest Rate Environment

Interest rates in Australia are shaped by a mix of factors, including:

• Inflation
• Economic growth
• Monetary policy decisions by the Reserve Bank of Australia (RBA)
• Global financial conditions

Over the past few years, the RBA has moved from record-low rates during the pandemic (as low as 0.10%) to a series of sharp increases aimed at taming inflation. These rate hikes have pushed borrowing costs higher, reshaped lender strategies, and forced borrowers to rethink their financial plans.

In this environment:

• Lenders are adjusting mortgage products to reflect increased funding costs.
• Discount offers are less aggressive.
• Lending criteria have tightened, with more scrutiny on borrower risk profiles.

While refinancing in a low-rate environment was often a no-brainer, today’s market demands careful evaluation.

Benefits of Refinancing in a Rising Rate Market

Despite the challenges, refinancing can still offer several advantages — particularly if you approach it strategically.

1. Accessing a More Competitive Rate

Even though average rates have increased, not all loans move in lockstep. If you’ve been on the same mortgage for years, your rate may be significantly above what’s available today.

By comparing offers or negotiating with your lender, you may still secure a lower rate, which can translate into long-term savings — especially on large loan balances.

2. Locking in Fixed-Rate Stability

Refinancing gives you the option to switch from a variable-rate loan to a fixed-rate loan, locking in your repayments for a set period.

In times of economic uncertainty, fixed rates can:

• Protect you from future rate hikes
• Provide predictability in your monthly budget
• Offer peace of mind as you plan ahead

3. Improving Loan Features and Flexibility

Refinancing isn’t just about the rate — it’s also an opportunity to upgrade your loan features.
For example:

• Adding an offset account to reduce interest costs
• Gaining access to redraw facilities
• Introducing flexible repayment options
  These improvements can help you manage your finances more effectively and potentially reduce the overall cost of your loan.

4. Consolidating Debt

If you’re juggling multiple debts — such as personal loans, credit cards, or car loans — refinancing into a single mortgage with a lower interest rate can:

• Simplify your repayments
• Lower your total interest costs
• Improve your cash flow

5. Adjusting Loan Terms to Match Financial Goals

Refinancing allows you to restructure your mortgage in line with your priorities.
For example:

• Extending the loan term to reduce monthly repayments
• Shortening the loan term to pay off your mortgage faster
• Moving to a loan that aligns with long-term investment plans

Risks and Challenges of Refinancing in a Rising Rate Environment

Refinancing isn’t risk-free — and the stakes are higher in a market where rates are climbing.

1. Higher Refinancing Costs

Refinancing typically involves upfront costs, including:

• Application fees
• Discharge fees
• Valuation fees
• Legal and administrative fees
• Potential break costs if you’re exiting a fixed-rate loan early

In some cases, these costs can cancel out the savings from refinancing — making it essential to do the maths before switching.

2. Risk of Moving Into Higher Rates

If you’re refinancing from a fixed-rate loan to a variable loan, you could expose yourself to higher repayments in the future if rates continue to rise.

3. Tighter Lending Criteria

Lenders have become more cautious, and refinancing applicants are now subject to rigorous assessment. This includes checks on:

• Credit score
• Loan-to-value ratio (LVR)
• Debt-to-income ratio (DTI)
• Employment and income stability

Borrowers with weaker profiles may find it harder to qualify or may be offered less competitive rates.

4. Long-Term Cost of Extending Loan Terms

Extending your loan term to lower your monthly repayments might provide short-term relief — but it increases the total interest paid over the life of the loan. Borrowers need to weigh this trade-off carefully.

When Does Refinancing Make Sense in a Rising Rate Market?

Refinancing is generally worth considering if:

• You can secure a materially better rate than your current loan offers.
• You want to lock in a fixed rate for stability in anticipation of further hikes.
• You need improved loan features like offset accounts or flexible repayments.
• You aim to consolidate higher-interest debts into your mortgage.
• You plan to stay in the property long-term, allowing you time to recover the upfront refinancing costs.

Smart Steps Before Refinancing

To ensure refinancing works in your favour, follow these practical steps.

1. Conduct a Loan Health Check

Review your current mortgage:

• What’s your interest rate?
• How much are your monthly repayments?
• Do you have useful features (like an offset account)?
• What’s your remaining loan term?

This will help you compare new offers meaningfully.

2. Compare Lender Offers

Use online comparison tools to:

• Benchmark available rates
• Assess features and fees
• Identify lenders offering refinancing incentives (such as cashback deals)

Consider consulting a mortgage broker for expert advice tailored to your circumstances.

3. Calculate Refinancing Costs

Tally up:

• Application fees
• Discharge fees
• Valuation fees
• Any break fees

Ensure that the savings from refinancing outweigh these costs over the period you plan to keep the loan.

4. Evaluate Loan Features and Terms

Look beyond the rate:

• Will the new loan offer flexibility?
• Are there restrictions on extra repayments or redraws?
• Is the reversion rate (post-fixed period) competitive?

5. Check Your Eligibility

Review your:

• Credit score
• Income stability
• Equity position (aiming for ≤80% LVR if possible)

These factors will influence which lenders and rates you qualify for.

Real-World Example

Consider a borrower with a $500,000 mortgage at a 6.0% variable rate who refinances to a new lender offering 5.5% on a fixed rate for three years.

• Monthly repayment at 6.0%: ~$3,199
• Monthly repayment at 5.5%: ~$3,068
• Monthly saving: ~$131

Even after accounting for $2,000 in refinancing costs, the borrower would recoup the switching costs within ~15 months and benefit from rate stability for the next three years.

Final Thoughts: Is Refinancing Still Worth It?

Refinancing in a rising rate environment is no longer a guaranteed money-saver — but it can still deliver substantial value if approached strategically.

Smart borrowers will:

• Assess their current loan performance
• Shop around for competitive offers
• Weigh the full cost of refinancing against potential benefits
• Consider locking in fixed rates for peace of mind
• Use professional guidance to navigate lender requirements

By doing careful research and weighing both the short-term and long-term impacts, homeowners and investors can make refinancing work — even in a tougher rate landscape.