What Are the Risks of Refinancing?

Refinancing your home loan can offer a range of benefits—lower interest rates, reduced monthly repayments, access to equity, and more flexible loan features. But while the rewards can be appealing, refinancing isn't without its risks. In fact, making the move without a clear understanding of the potential downsides can lead to unexpected costs and long-term financial strain.

Before jumping into a new loan, it’s important to consider all aspects of refinancing and whether it genuinely aligns with your financial goals. In this comprehensive guide, we’ll break down the key risks associated with refinancing and explain how working with a trusted financial broker like Clear Path Financial Group can help you avoid common pitfalls and make a well-informed decision.

1. Break Costs on Fixed Rate Loans

If you're currently on a fixed-rate mortgage and looking to refinance before the end of your fixed term, you may be hit with break fees. These are charges applied by lenders to compensate for the loss of expected interest.
Break costs are typically calculated based on:

• The remaining fixed term
• The interest rate difference between your old and new loan
• The loan balance

In some cases, these fees can amount to several thousand dollars, effectively cancelling out the savings you'd gain from refinancing to a lower rate.

Tip: Always ask your current lender for a break cost estimate before considering refinancing. A broker can help assess whether switching is still financially worthwhile after factoring in this fee.

2. Loan Application and Exit Fees

Refinancing involves ending one loan and starting another, and both actions often come with associated costs. These can include:

• Discharge fees from your current lender
• Application or establishment fees for the new loan
• Valuation fees on your property
• Settlement or legal fees

These upfront costs can range from a few hundred to over a thousand dollars. If the financial gain from refinancing isn’t significant, these fees could negate any long-term benefit.

When you work with a transparent and ethical broker like Clear Path Financial Group, these costs will be calculated upfront and factored into the decision-making process.

3. Extending the Loan Term

One of the hidden risks of refinancing is restarting your loan term. For example, if you’ve already been paying your mortgage for 8 years and refinance into a new 30-year loan, you may reduce your monthly repayments but pay more interest over the life of the loan.

Unless you maintain your original loan term or make extra repayments, extending your mortgage term means:

• Delayed mortgage-free status
• Increased total interest costs
• More long-term financial commitment

A good broker will help you compare not just the monthly repayments, but also the total cost over the full loan term.

4. Reduced Home Equity

Some homeowners refinance to access equity for renovations, investment, or debt consolidation. While this can be a smart move when done responsibly, over-borrowing against your home can leave you with minimal equity, increasing your financial vulnerability.

If property prices fall or your circumstances change (such as a job loss), having limited equity can restrict your ability to refinance again, sell easily, or manage your mortgage.

Equity is a safety net—it’s important not to stretch it too thin without a clear strategy in place.

5. Risk of Higher Interest Rates After a Fixed Period

If you refinance into a new fixed-rate loan, remember that once the fixed period ends, the loan typically reverts to a standard variable rate, which can be significantly higher.

Borrowers often forget to review their loan at the end of the fixed term and end up paying more than they should. This can erode the financial advantage gained from refinancing in the first place.

Strategy: Set a reminder to review your mortgage 3–6 months before the fixed period ends and explore your options again if necessary.

6. Lender’s Mortgage Insurance (LMI)

If your new loan exceeds 80% of the property’s value (Loan-to-Value Ratio), you may be required to pay Lender’s Mortgage Insurance—even if you paid it when you first bought your home.

Unfortunately, LMI isn’t transferable between lenders, so refinancing can trigger another large LMI premium, particularly if your property has lost value or you’re borrowing more.
This makes refinancing less beneficial unless the financial gains significantly outweigh the cost of LMI. A careful equity and borrowing assessment is essential here.

7. Impact on Credit Score

Every time you apply for credit, including a new home loan, the lender performs a credit inquiry. Too many inquiries in a short period can affect your credit score, potentially limiting future borrowing opportunities.

Additionally, if your refinancing application is rejected, this will also be recorded on your credit file. While one or two inquiries won't drastically lower your score, it’s important to avoid shopping around blindly.

Using a broker ensures that loan comparisons are done without triggering multiple applications, protecting your credit profile.

8. Misalignment with Financial Goals

Refinancing should always be done with clear, long-term goals in mind. However, some borrowers refinance to chase short-term savings without considering:

• Their future property plans
• Their ability to maintain new repayments
• Whether they’re likely to move or sell soon
• How refinancing affects retirement planning

For example, refinancing to access equity for discretionary spending (like a holiday or new car) can result in years of unnecessary interest and a weaker financial position overall.

Before refinancing, always revisit your financial objectives to ensure the move supports your broader goals.

9. Switching to an Unsuitable Loan Product

A new loan might come with appealing perks like a lower rate, offset account, or flexible repayment terms—but it could also introduce hidden restrictions or lack features you currently rely on.

Common issues include:

• No redraw facility
• Limited repayment options
• Lock-in periods or break fees
• Less responsive customer service from the new lender
• When refinancing, it’s vital to evaluate the entire product offering, not just the rate.

How to Reduce the Risks of Refinancing

Refinancing doesn’t have to be risky—informed decisions backed by expert advice can make all the difference. Here’s how to protect yourself:

Work with a reputable financial broker who can compare hundreds of loan products and explain the pros and cons of each.

• Calculate the total cost of switching, including fees and potential long-term interest.
• Avoid unnecessary extensions of your loan term unless financially justified.
• Ensure the new loan supports your future plans, not just your current circumstances.
• Read the fine print to fully understand the new loan’s features and limitations.

How Clear Path Financial Group Helps You Refinance Safely

At Clear Path Financial Group, we believe that refinancing should never be a rushed or uninformed decision. Our team provides honest, client-first advice so you can confidently evaluate whether refinancing is the right step for your financial journey.

We differentiate ourselves through:

• Clear, jargon-free explanations of refinancing pros and cons
• Full cost-benefit analysis tailored to your goals
• Wide access to lenders so you’re not stuck with a limited choice
• Ongoing support, even after your new loan is settled

Our refinancing services are designed to give you a clear roadmap, whether your priority is reducing repayments, funding renovations, consolidating debt, or accessing equity.

Final Thoughts

Refinancing can be a smart financial move—but it’s not without its risks. From hidden fees and extended loan terms to unsuitable products and credit score impacts, understanding the full picture is essential before making the switch.

That’s why partnering with a trusted financial broker like Clear Path Financial Group is critical. With a transparent, ethical approach, you’ll get all the information you need to make the right decision, at the right time, for the right reasons.

Frequently Asked Questions (FAQs)

1. Is refinancing always a good idea?

No. While it can lead to savings, refinancing isn’t always beneficial, especially if fees, break costs, or your financial situation don’t align with the move.

2. How can I tell if refinancing is worth it?

Compare the total cost of your current loan versus the new one, including fees and interest over time. A broker can help calculate your breakeven point.

3. What is the biggest risk of refinancing?

Extending your loan term and paying more interest in the long run is one of the most overlooked risks.

4. Can refinancing hurt my credit score?

Yes, if you make multiple loan applications in a short time. Using a broker avoids this by conducting soft comparisons before applying.

5. Will I have to pay Lender’s Mortgage Insurance again?

Possibly. If your new loan is over 80% of the property’s value, LMI may apply again, even if you paid it on your original loan.