What Are the Risks of Refinancing?

Refinancing can be a smart way to lower your repayments or get a better loan—but like any financial decision, it’s important to understand the risks.

Here are the main things to look out for.

1. Upfront Costs Might Outweigh the Benefit

Refinancing isn’t free. While the goal is to save money, the switch often comes with discharge fees, application fees, government charges and possibly valuation costs.

If the interest savings are small, these upfront costs could outweigh the benefit—at least in the short term. It’s important to calculate how long it would take to recoup any out-of-pocket expenses and know your break-even point.

2. You Might Pay Lenders Mortgage Insurance (Again)

If your equity is under 20%, refinancing to a new lender usually means paying LMI again—even if you already paid it once.

LMI can cost thousands, and it doesn’t transfer between lenders. That’s why many people wait until they have more equity before refinancing.

If your property value has dropped, you may be closer to the 80% threshold than you thought—so it’s worth checking before you apply.

3. Extending the Loan Term Can Cost You More

Some people unintentionally reset their loan term to 30 years when refinancing. While this can lower monthly repayments, it also means you’ll be in debt longer and pay more interest over time.

If you’re not careful, refinancing could stretch your loan back out, undoing years of progress.

4. It May Affect Your Credit Score

Every refinance application is a credit enquiry. That’s normal. But multiple applications in a short time can temporarily reduce your score.

If you’re planning to borrow again soon (for a car, investment or renovation), it’s worth spacing things out.

5. You’ll Need to Qualify All Over Again

Refinancing means applying for a new loan. If your income has dropped, your expenses have increased, or lending criteria have changed, you may not be approved, even if you’ve always paid on time.

This is one reason some borrowers feel “stuck” with their current lender. If you’re unsure whether you’ll qualify, it’s worth checking your borrowing capacity before you begin.

6. You Could Lose Features You Value

Not all loans have the same features. If you currently have an offset account, multiple loan splits, or certain fee waivers, check that these are available with any new loan you’re considering.

A lower rate is helpful—but not if you lose tools you rely on.

7. The Transition Isn’t Always Seamless

Most refinances are smooth, especially with broker support. But there can be timing issues like overlapping repayments or delays with redraw access.

Good communication helps, but it’s worth being prepared for a short adjustment period.

8. You Might Use the Savings Poorly

One unexpected risk of refinancing is behavioural. If your repayments drop and you simply spend the extra, you could miss out on the real benefit.

Similarly, if you access equity during the refinance, it’s important to use it wisely—whether for renovations, investing or reducing higher-interest debts.

9. Fixed Rate Loans Come With Conditions

If you’re refinancing from a fixed rate, check whether break costs apply. These can be significant if rates have fallen since you locked yours in.

If you’re refinancing to a fixed rate, keep in mind that breaking it early down the track may involve similar penalties.

How to Minimise These Risks

• Do the numbers. Look at total savings after costs, not just the rate.
• Ask about loan term options so you don’t add years unintentionally.
• Make sure you qualify before you apply, especially if your circumstances have changed.
• Check that you’re not giving up useful features.
• Use the savings strategically, whether to pay down the loan faster or strengthen your finances.

Final Thoughts

Refinancing can be a positive step, but only if it improves your situation, not just your rate.

A quick check-in with a broker can help you explore your options, understand the trade-offs, and make sure the decision lines up with your goals.

That way, you’ll not only avoid the risks, you’ll actually get the full benefit of making your loan work better for you.