Debt refinancing – traps and tips

By Rowan Tracey, HLB Mann Judd Perth

With interest rates on the rise, many Australian houesholds and businesses are feeling the cash flow squeeze. In this environment, refinancing or consolidating debt can be an effective way to manage. But while refinancing can offer clear benefits, it also comes with risks.

For borrowers with multi-purpose loan facilities with a mixture of private and business use, refinancing can quickly become complex. Tracking tax-deductible interest can be challenging and time-consumingm making it even more important to approach refinancing strategically.

Below are some of the key traps to avoid, along with practical tips to ensure you get the most from any refinancing decision:

Common traps to watch for

One of the most common pitfalls is extending the term of a loan to reduce short-term repayments. While moving from a 20-year loan to a 30-year term, for example, may ease immediate cash flow pressures, it can result in significantly higher interest costs over the life of the loan. This is particularly relevant when consolidating short-term and longer-term debts, such as car loans.

Another important consideration is security. Refinancing business debt may require additional guarantees, such as personal or director guarantees, or even the use of private assets like the family home as collateral. While this may help secure more favourable terms, it can also expose personal assets to business risks, something borrowers should make sure they understand and avoid where possible.

Fees are another area where borrowers can be caught out. Some lenders promote highly competitive rates but offset these with hidden fees buried in the fine print. Establishment fees, exit fees, and ongoing charges can quickly wipe any perceived savings, so it’s essential to fully understand the total cost of refinancing before committing.

Finally, timing matters. Refinancing decisions made under pressure, especially when needed to quickly free up cash flow, can limit your ability to negotiate and compare options effectively. Ideally, refinancing should be proactive rather than a reactive necessity.

Tips for smarter refinancing

Start by engaging with your current lender. In many cases, a better deal may be closer than you think. Lenders are often willing to renegotiate terms to retain customers, particularly if you signal that you are considering other options.

It also pays to shop around. While Australia’s major banks remain competitive, there are also attractive offers from second-tier and specialist lenders. Although the application process can be time-intensive and sometimes frustrating, the potential savings and improved terms can make the effort worthwhile.

Preparation is key. Lenders will require detailed financial information to assess your application, including both personal and business data. Understanding your financial position and your capacity to service debt is critical, particularly if your circumstances have changed since your original loan was approved.

Finally, consider structuring your debt more effectively. Where possible, separating deductible (typically business-related) and non-deductible (private) debt into different facilities can provide greater flexibility. This allows you to prioritise repayment of non-deductible debt, which is generally more costly from a tax perspective.

The bottom line

Refinancing can be a powerful tool for improving financial outcomes, but taking the time to understand the risks, ask the right questions, and explore all available options can make a big difference. With a considered approach, borrowers can avoid common traps and position themselves for stronger long-term financial health.