Refinance / Restructuring
Risks Of Refinancing
5 min read- Finance Guide
- Updated 2026
Quick answer
Refinancing can save money but it can also
Backfire
If fees, break costs, policy limits or loan term resets are ignored
- Assessment buffer +3% above rate
- Property valuation Can reduce available equity
- Approval Not guaranteed
1300 421 044
1300 421 044
Detailed explanation
Refinancing can be useful when it improves pricing, structure or flexibility, but every refinance introduces a fresh set of risks. Some are financial, such as fees and break costs. Others are structural, such as resetting the term and paying interest for longer. There is also approval risk, because the new lender applies current rules rather than the rules that existed when the original loan was approved.
Main refinance risk factors
A refinance can create or expose risks in areas like:
-
Break costs and discharge fees
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Resetting the loan term and increasing total interest
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Property valuation coming in lower than expected
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Borrowing capacity falling under current policy rules
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Cash out or equity release being limited
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Losing features or flexibility that the current loan already has
The practical issue is simple. A refinance that looks cheaper on rate alone can still leave the borrower worse off once time, fees, break exposure and long term interest are properly counted.
What can go wrong
Refinancing can lead to problems such as:
Paying high exit or break costs- Extending the loan term too far
- Failing serviceability under current assessment rules
- Getting a lower property value than expected
- Losing offset, redraw or repayment flexibility
- Rolling unsecured debt into a long term mortgage
- Receiving less usable equity than planned
Even when the monthly repayment falls, the total interest bill can still rise if the balance is repaid over a much longer period
Why approval risk matters
A common risk is assuming the new lender will simply match the current loan. That is not how refinance assessment works. The new application is judged under current rules, with current evidence and current property value. If income has changed, expenses are higher, debt levels are heavier or the property no longer fits policy as well, the refinance can be reduced, delayed or declined.
APRA serviceability buffer — 3 percentage points Borrowers are still assessed above the actual loan rate when applying for a refinance. That means a refinance can fail serviceability even where the current loan is already in place and being paid.
Financial risks and switching costs
The refinance can become uneconomic when upfront and embedded costs are not measured properly
Common risk areas include:
Discharge settlement fee on the current loan- Registration, legal or settlement related costs where applicable
- Application, establishment or valuation fees on the new loan
- Fixed rate break cost or administration fee
- Higher long term interest if the loan term is reset too far
Major refinance warning
Leaving a fixed rate loan early can trigger a break cost, and switching can also involve discharge, valuation and establishment costs. Even where the new rate is lower, the refinance may still be a poor outcome if the breakeven period is too long or the term extension materially increases lifetime interest.
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Common Problems
Refinance risk usually shows up when the borrower chases a headline saving but does not test the deeper credit, valuation and long term repayment consequences.
The refinance looks cheaper but costs more over time
A lower rate or repayment can still produce a worse long term result if fees are high, the term is reset or unsecured debt is rolled into a long mortgage.
Possible solutions include:
- Compare total cost not just rate
- Calculate a breakeven period before switching
- Avoid extending the term more than necessary
- Keep debt consolidation separate if it weakens the overall result
This is one of the most common refinance traps because monthly savings can hide a much larger lifetime cost.
Valuation or policy risk reduces the deal
The borrower may expect a certain value or cash out amount, but the lender may assess the property or the file more conservatively.
Possible solutions include:
- Work from realistic value assumptions
- Lower the target LVR if needed
- Reduce the requested equity release
- Use a lender whose policy suits the property and scenario better
A lower value can shrink borrowing power quickly and change whether the refinance is viable at all.
Approval fails under current standards
The current loan may be performing, but the refinance can still fail if current income, expenses or debt levels do not pass the new lender's assessment.
Possible solutions include:
- Test serviceability before applying widely
- Reduce the proposed loan amount
- Delay unnecessary cash out
- Restructure the scenario around current policy rather than historic approval
Current policy settings matter more than past approvals when a refinance is being assessed.
Steps to manage refinance risk
Step
01
Check the current loan balance, term, rate type and any fixed period exposure.
Step
02
Estimate all switching costs including break, discharge, valuation and setup fees.
Step
03
Measure likely borrowing capacity and realistic property value before relying on the outcome.
Step
04
Compare total repayment outcome rather than just the proposed new rate.
Step
05
Check that the new loan still gives the features and flexibility actually needed.
Step
06
Proceed only if the refinance still improves the position after costs, policy and long term repayment impact are tested.
Speak with a property refinance specialist.
Refinance risk is rarely limited to the interest rate alone.
A proper review can test whether the refinance still makes sense once fees, fixed rate exposure, term reset, valuation assumptions and current policy are all taken into account before the application moves too far.
Speak with a property refinance specialist about refinance risk.
Submit the short form below and a specialist can review the likely risks, costs and policy issues before you commit to a refinance path.
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Additional Questions
You may also find these questions helpful
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01Can refinancing increase the total interest you pay?
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02What happens if the property valuation is lower than expected?
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03Are fixed rate break costs worth paying to refinance early?
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04Can a refinance be declined even if the current loan is being paid?
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05How do you know if the savings really outweigh the costs?
