Three Types of Refinance, Three Completely Different Goals — Which One Fits You?

A video I made about refinancing strategy was viewed by nearly 300,000 people. The most common response I got wasn't "thanks for the tip." It was: "Wait, there's more than one type of refinance?"

Yes. There are three. And they have entirely different purposes, entirely different risk profiles, and entirely different outcomes. Mixing them up — or worse, applying the wrong one to your situation — can leave you worse off than if you'd done nothing.

I'm going to break down all three, explain who each one is designed for, and give you a framework to decide which applies to your circumstances. If you take anything from this article, let it be this: refinance is a tool, not a strategy. The strategy is what you're trying to achieve. The refinance is just the mechanism.

Type 1: Rate and term refinance (goal: save money)

This is the simplest and most common form. Your loan balance stays exactly the same. You're simply moving your existing mortgage to a different product or a different lender that offers a lower interest rate.

The maths is straightforward. If you're paying 6.5% on a $600,000 loan and you refinance to 5.9%, you save 0.6% per annum — that's $3,600 per year, or $300 per month 1. Over the remaining life of a 25-year loan, that rate difference compounds to approximately $90,000 in total interest savings.

The process: call your current bank and tell them you're considering switching. Many banks have a "retention team" whose job is to offer you a lower rate before you leave. If their offer isn't competitive, go through a mortgage broker who can compare 30+ lenders simultaneously.

One thing most people don't realise: you don't need to refinance your entire loan. If you have a split loan (part fixed, part variable), you can often refinance just the variable portion while leaving the fixed component in place until it expires. Breaking a fixed loan early incurs a "break cost" that can run into thousands of dollars — sometimes more than the rate saving 2.

Rate-and-term refinance suits anyone who hasn't reviewed their interest rate in the past 12-18 months. If you're on a rate above 6.2% right now and your LVR is below 80%, there's almost certainly a better deal available. The switching cost (discharge fee from old lender, application fee at new lender) is typically $500-$1,000 — paid back within 2-3 months of rate savings.

"Call your bank every 12 months and tell them you're leaving unless they match the best available rate. The 15-minute phone call saves $3,000 or more per year. Most people spend more time choosing a restaurant than reviewing their mortgage rate." — Yan Zhu

Type 2: Cash-out refinance (goal: extract equity)

This is the investor's tool. Instead of just changing your rate, you're borrowing additional money against your property's increased value.

How it works: say you bought a property for $700,000 three years ago with a $560,000 loan (80% LVR). The property is now valued at $900,000. Your current loan balance has been paid down to $540,000. Your equity is $360,000.

With a cash-out refinance, you take a new loan at 80% of the current value — $720,000. After paying out the existing $540,000 loan, you receive $180,000 in cash 3.

That $180,000 is not income. It's not taxable. It's borrowed money secured against your property's equity. What you do with it determines whether this is a brilliant move or a costly mistake.

Good uses for cash-out equity:

• Deposit on your next investment property ($180,000 covers two 20% deposits on $450,000 properties, or one deposit on a $900,000 property)
• Funding a granny flat construction ($110,000-$160,000) that will increase both value and rental income
• Paying off non-deductible debt (like a personal car loan) while replacing it with tax-deductible investment debt

Bad uses for cash-out equity:

• Holiday. Don't laugh — I've seen it.
• "Emergency fund" sitting in a savings account earning 4% while you're paying 6.2% on the borrowings
• Funding a renovation on your own home (the interest isn't tax-deductible if it's your residence)

The critical detail: when you cash out equity from an investment property, the interest on the additional borrowing is tax-deductible only if the funds are used for income-producing purposes. If you pull $180,000 from your investment property and use it as a deposit on another investment property, the interest is fully deductible. If you use it to buy a boat, it's not 4.

Your total loan balance increases. Your monthly repayments increase. You need to be confident that your rental income (existing plus new) can service the higher debt. Our rule of thumb: only do a cash-out refinance if the rental yield on your next purchase exceeds the interest cost on the additional borrowing.

Type 3: Debt consolidation refinance (goal: reduce pressure)

This is the lifeline option. It's designed for people who are juggling multiple debts — mortgage, car loan, credit cards, buy-now-pay-later — and struggling to keep up with the total monthly burden.

The concept: you refinance your home loan to a higher amount that pays off all your other debts. Everything gets rolled into one monthly payment at the home loan interest rate (currently around 6-6.5%), which is dramatically lower than credit card rates (18-22%) or personal loan rates (8-14%) 5.

Example: You have a $500,000 mortgage at 6.2%, a $30,000 car loan at 9%, and $15,000 in credit card debt at 20%. Your combined monthly repayments are approximately $4,100. If you consolidate everything into a $545,000 mortgage at 6.2%, your monthly repayment drops to approximately $3,500. That's $600 per month of immediate breathing room.

Sounds great. Here's the trap.

That $30,000 car loan had 4 years remaining. That $15,000 credit card debt could theoretically be paid off in 2 years with discipline. By rolling them into a 25-year mortgage, you've extended the repayment period dramatically. The total interest paid on that $30,000 car loan over 4 years at 9% was about $5,800. The total interest on $30,000 over 25 years at 6.2% is approximately $30,000 6. You saved $600/month in cash flow but committed to paying an extra $24,000 in interest over the life of the loan.

Debt consolidation is not wealth building. It's emergency management. I recommend it only for people who are genuinely at risk of defaulting on one or more obligations. If you're servicing all your debts on time but feeling stretched, Type 1 (rate refinance) or simply tightening your budget is the better solution.

If you do consolidate, the most important follow-up action is: cut the credit cards. Literally. If you consolidate $15,000 in credit card debt into your mortgage and then run the cards back up, you've doubled the problem.

"Debt consolidation is a tourniquet, not a cure. It stops the bleeding so you can address the underlying issue. The underlying issue is almost always spending discipline, not interest rates." — Yan Zhu

How to decide which type you need

Ask yourself one question: what is the single biggest financial problem I'm trying to solve right now?

If the answer is "my interest rate is too high" → Type 1 (Rate and term). Zero risk, immediate savings, 15-minute phone call to start.

If the answer is "I need capital for my next investment" → Type 2 (Cash-out). Medium risk, requires careful structuring for tax efficiency, needs a broker who understands investment lending.

If the answer is "I can't keep up with all my repayments" → Type 3 (Debt consolidation). High risk if not managed carefully, but necessary if you're approaching default.

The wrong choice:

• Doing a cash-out when you should be consolidating (adding debt when you're already struggling)
• Doing a consolidation when you should be doing a cash-out (missing investment opportunities because you're focused on reducing pressure rather than building wealth)
• Doing nothing when a rate refinance would save $3,000+ per year (pure laziness tax)

Most property investors I work with should be doing Type 1 annually and Type 2 every 2-3 years as their properties appreciate. Type 3 should be a once-in-a-career event at most. If you're consolidating debt more than once, the issue isn't your mortgage structure — it's your spending.

Before initiating any refinance, check three numbers:

1. Your current LVR (property value minus outstanding loan, divided by property value)
2. Your current interest rate versus what's available in the market
3. Any break costs or discharge fees that would apply

A good mortgage broker can assess all three in a single consultation. We work with brokers who handle all three types and understand how to structure the tax deductibility of each — which is where most refinances go wrong.