Rates are up, but is now the right time for you to refinance?

Refinancing is often considered a miracle cure for homeowners facing mounting debt. But if you're doing it just because a broker suggested it, you might be treating a symptom rather than the actual problem.

The dilemma comes as the cash rate rose 25 basis points to 4.10 per cent this week after a hike in inflation sat above the Reserve Bank of Australia's target.

This is the second rate rise within two months, and banks are expected to raise mortgage rates in line with the RBA lift.

Should you refinance?

Refinancing may be worthwhile, depending on whether the switch improves the overall value of the loan, rather than just the headline interest rate, explains David Warburton, finance broker at Rate Challenge.

"In many cases, borrowers refinance to reduce their overall repayments, access better features such as offset or redraw, or consolidate debt. Over the past couple of years, we've also seen borrowers refinance simply to regain some control over their cash flow as interest rates have risen," Mr Warburton said.

But refinancing isn't automatically the right move for everyone.

"The important question is whether the new loan genuinely leaves you better off once you factor in the interest rate, fees, features and flexibility," he said.

The cons

1 Hidden costs

It can cost to move your loan elsewhere. Lenders usually charge a discharge fee, application fees and potentially break costs if a borrower is leaving a fixed-rate loan.

In some cases, borrowers refinance to save a small amount on interest but extend their loan term back to 30 years, which can increase the total interest paid over the life of the loan.

Make sure it stacks up financially for you.

2 Loan terms reset

"Another factor often overlooked is that refinancing can reset the loan term. While that can lower the repayments in the short term, it can also increase the total interest paid over the life of the loan if borrowers aren't careful," Warburton says.

3 Bad habits creep in

The behavioural impact of refinancing that is often overlooked is the temptation among homeowners to treat the difference saved as new spending capacity, instead of redirecting it towards debt reduction or savings, which can dilute the financial benefit of refinancing.

4 Extending the life of your loan

It's very important you make careful calculations. The fact is that every time you refinance and extend your loan term, you're keeping your debt for longer according to Grant Millar, the owner of Inspired Financial Planners.

"The less you make in repayments, the more interest you pay, which means you'll end up paying the bank more than you would spend simply paying back the debt," Mr Millar said.

The Pros

1 Cashback offers

You might be offered a refinancing cashback as an incentive to move to a different lender.

While Mr Warburton admits these can be a nice bonus and can help offset some of the switching costs, borrowers should be careful not to make a decision based on the cashback alone.

If you don't do your sums, your cashback could be nothing more than a gimmick.

"If the interest rate, fees and overall loan structure don't stack up, that incentive can get eaten up fairly quickly over time," Mr Warburton said.

2 More flexibility

Moving to a new lender could give you greater flexibility in your repayment amounts.

Mr Millar said that refinancing can allow you to select to fix part of the new loan so that your repayments won't change for a long period of time, even if your interest rates do.

"You could also ensure your new loan allows multiple offsets, allowing every dollar in your account to keep reducing the interest you pay, as opposed to redraw accounts, where you need to keep money in that specific account to reduce interest," Mr Millar said.

3 Access to equity

If the value of your home has increased since you bought it, you may be able to borrow funds purely from the value of your home.

"If the bank allows you to borrow against the value of your existing property, you may be able to use the value of your home to invest in another property, or invest in shares, or simply use the funds for other purposes, like improving your existing home, which would further increase its value," Mr Millar said.