Mortgage rates have dropped — but should you refinance?
Mortgage rates in Australia and Europe declined sharply in January 2025, reaching their lowest point since May 2024. Several major lenders reduced variable rates to 4.95–5.60% after funding costs fell and competition for new borrowers increased.
Data from the Reserve Bank of Australia (RBA) and lending comparison platforms show refinancing activity dropped by 12% in Q4 2024 as property sales slowed.
For homeowners currently paying above 6.20%, refinancing could deliver savings of AUD 3,500–4,200 per year depending on loan size and lender fees.
Why did mortgage rates fall?
The primary driver was a reduction in wholesale funding costs. According to the RBA’s January 2025 bulletin, bank funding spreads declined by 0.35% as markets priced in slower inflation and reduced cash rate expectations.
- Lower bank funding costs
- Increased competition among lenders
- Weaker property market activity
- Stabilizing inflation
In Europe, the European Central Bank (ECB) signaled that inflation had slowed to 2.8%, increasing expectations of rate cuts later in 2025. As a result, several lenders across Spain, Germany and the Netherlands began offering promotional fixed terms.
How much could you save?
Refinancing can produce significant savings. For example:
Loan amount: AUD 600,000 Current rate: 6.40% New rate: 5.20% Annual savings: AUD 4,320 Monthly savings: AUD 360
Even smaller rate reductions can have a meaningful impact over the life of a mortgage.
Who benefits the most?
Homeowners are most likely to benefit if they:
- Have strong credit scores
- Have loan-to-value ratios below 80%
- Plan to stay in the property for several years
- Are currently paying above 6%
What about fixed rate borrowers?
Many borrowers in Australia are still on fixed rates secured before 2023. Breaking these contracts can involve significant exit fees, making refinancing less attractive unless the savings outweigh the costs.
Risks to consider
Refinancing is not always beneficial. Potential risks include:
- Exit fees and break costs
- Higher comparison rates after promotional periods
- Resetting the loan term and increasing long-term interest paid
- Variable rate uncertainty
EU refinancing trends
According to Eurostat housing finance data, refinancing activity increased by 8% in late 2024, driven by lower inflation and aggressive marketing by regional lenders.
Should you refinance now?
Refinancing makes sense if:
- Your rate is above 6%
- You plan to stay in the home for 3+ years
- Your break fees are low
- You can secure a rate below 5.5%
However, waiting could also be beneficial if further rate cuts occur later in 2025.
Bottom line
With mortgage rates declining, many households could reduce their repayments and improve cash flow by refinancing. The decision depends on your current rate, loan conditions, and long-term plans.
Always compare total loan costs, not just the headline rate.
This article is general information only and does not constitute financial, investment, legal, or tax advice. It does not consider your objectives, financial situation, or needs. You may wish to seek personalised advice from a licensed professional before making financial decisions.