I get asked about refinancing more than almost anything else, usually triggered by a friend mentioning a lower rate or a bank's relationship manager calling with an offer. Refinancing can absolutely save you money, but it is a maths problem before it is a decision, and skipping the maths is how people end up switching loans for a saving that gets eaten up entirely by costs they did not account for.
The two real reasons to refinance
Most refinancing falls into one of two categories. The first is repricing or refinancing purely to capture a lower interest rate once your existing lock-in period ends, which is the straightforward case most people think of. The second is restructuring, where the goal is not just a lower rate but a different loan structure entirely: extending tenure to free up monthly cashflow, switching from a floating to a fixed rate ahead of an expected rate move, or unlocking equity for a further investment. These two situations call for different analysis, because the second one is not purely about comparing interest rates.
The real cost of switching lenders
A lower rate from a new bank is the headline, but it is not the full picture. Refinancing typically involves legal fees and a valuation fee, both of which the new bank may or may not subsidise. If you are still within your existing lock-in period, you will likely face a prepayment penalty, often a percentage of the outstanding loan. And if you took up any subsidies, such as legal fee subsidies, on your current loan, switching before the clawback period ends usually means repaying them. None of this makes refinancing a bad idea; it just means the comparison has to be between the total cost of switching and the total interest saved, not between two headline rates.
When the maths clearly works
Refinancing tends to clearly pay off when you are well past any lock-in or clawback period, when the rate gap between your current loan and the best available offer is wide enough to cover the switching costs within twelve to eighteen months, and when you still have enough years left on the loan for the savings to accumulate meaningfully. It also makes sense even at a smaller rate gap if your real goal is restructuring, for example freeing up monthly cashflow ahead of a second property purchase, where the value is not purely in the interest saved.
When it usually does not
Refinancing is harder to justify when you are still deep inside a lock-in period and the penalty would consume most of the saving, when there are only a few years left on the loan and there is simply not enough time for the saving to outweigh the switching costs, or when the rate gap is marginal and the main motivation is a vague sense that you should be doing something rather than a clear number showing a benefit.
A simple way to check before you commit
Before signing anything, I ask clients to add up every one-off cost of switching, legal fees, valuation fees, any penalty, and any clawback, and compare that total against the actual monthly saving multiplied by however many months remain until they would naturally reprice anyway. If the saving clears that total within a year or so, it is usually worth doing. If it takes several years to break even, it is worth asking whether the better move is simply to reprice with your existing bank instead, which is often faster and cheaper than a full refinance.
If you are not sure which side of that line your loan falls on, send me your current rate and remaining lock-in and I will help you work out the actual numbers rather than just the headline.