What is refinancing?
Refinancing a home loan is the process of switching from one home loan to another, either with the same or a different lender. Once your application has been approved, your chosen lender will pay out your old loan and set up your new one.
How does refinancing work?
Refinancing a home loan is more straightforward than many might think. For most borrowers it follows this six-step process:
- Selecting your home loan: Choose the home loan you wish to apply for, or ask your mortgage broker for their recommendations. In addition to a competitive interest and comparison rate, you may look for features that could help you save money like an offset account or redraw facility.
- Applying for the new loan: You’ll need to gather relevant information for your application, such as pay slips, bank statements, and photo ID.
- Loan approval: Once you’ve submitted your application, the lender will likely complete a valuation of your home. The outcome of this matters because if you need to borrow 80% or more of your home’s current market value, you’ll generally be asked to pay lenders mortgage insurance (LMI). This applies even if you paid LMI when you first purchased the property, as LMI can’t normally be transferred between lenders.
- Signing the loan documents: If your application is approved, your new lender will send you or your mortgage broker a set of documents for you to sign.
- Discharging your old loan: At this stage, your new home loan is almost ready to go, and your new lender will get in touch with your old one to pay out your old loan.
- Relax with your new mortgage: With your old home loan paid out, the refinancing process is complete, and you can start making repayments on your new mortgage.
If you’re refinancing with your current lender, perhaps you’re moving from one loan product to another, this process may be even more straightforward.
How long does it take to refinance a home loan?
How long the process of refinancing takes will vary between lenders, with some taking a few days and others a few weeks.
In general, you can expect your refinance to take about a month. Having all the necessary documents ready to submit when you apply could help to clear any roadblocks on your end and speed up the process.
When should you consider refinancing a home loan?
- Your loan’s interest rate isn’t competitive: If your rate is higher than those your lender is offering new customers, or you feel your repayments are too high, it could be time to look into refinancing. You can use our home loan comparison tables to get an idea of your lender’s latest rates, along with those of many others. It can be helpful to see at a glance if your current rate is still competitive. If it’s not, it may be time to consider switching.
- It’s been a few years since you reviewed your home loan: Treating your home loan as a set-and-forget product may lead to you paying a higher rate than necessary. The home lending market can change rapidly, especially if the cash rate is increasing or decreasing. If it’s been a year or two since you last checked your home loan rate, you might not be on the best deal anymore.
- You want access to extra funds: Increasing your loan size or opening a line of credit could help you access the equity you have in your home (the difference between your outstanding mortgage and your home’s value). These funds could be used for major purchases, like renovating your home or purchasing a car.
- You’re coming off a fixed rate: When your fixed rate period ends you’ll typically revert to your lender’s standard variable rate, which may not be competitive when compared to other variable rate loans on the market. Being proactive and searching for a more competitive rate when your fixed rate period is coming to an end is often worth doing.
- You want additional loan features: You may not have been offered certain features when you initially took out your home loan and now wish to utilise them. An offset account could help you pay less in interest, whereas a redraw facility or the ability to make extra repayments may help you pay off your loan faster.
- You want to fix your home loan: If interest rates are low or you want to avoid potential rate rises, you might consider fixing your home loan. If you find a fixed rate home loan from a different lender that offers better value, it may be time to refinance.
Fees, rebates, and cashback offers: what to watch for
When refinancing, it’s important to look beyond the headline rate. Fees and incentives can affect the true cost of switching, and in some cases, a lower rate with higher fees may not work out cheaper overall.
Common refinancing costs include:
- Application or establishment fees: Charged by some lenders when you take out a new loan.
- Property valuation fees: Often covered by the lender, but not always.
- Discharge fees: Usually charged by your existing lender to close your current mortgage.
- Monthly or annual package fees: If you take out a packaged home loan, associated fees can add up over time and should be included in your cost comparison.
Make sure you calculate the full cost of switching, including fees on both the old and new loan.
Cashback offers
Many lenders offer cashback deals, sometimes several thousand dollars, to encourage borrowers to switch. These can be appealing, especially when upfront costs are a barrier. It’s worth bearing in mind, however:
- Cashbacks usually come with strict eligibility criteria, like a minimum loan size or LVR requirements.
- They don’t necessarily mean the loan is better value in the long run. A competitive rate and lower fees generally deliver more meaningful savings over the life of the loan.
- Some lenders have tightened or withdrawn cashback promotions in favour of lower ongoing rates, so it’s important to compare both the incentive and the long-term cost.
Rebates and fee waivers
Some lenders may offer limited-time fee waivers on valuation or settlement costs. These can reduce your upfront refinancing expense but, like cashback offers, should be considered alongside the interest rate and features available.
A cashback or rebate can be a helpful bonus, but it shouldn’t be the deciding factor. Compare the full cost of the loan – interest rate, fees, features, and long-term savings – to make sure refinancing truly works in your favour.
What happens to your equity when you refinance?
If you borrow the same amount with your new loan, your home equity is unchanged and will act as security on the new mortgage. If you want to access additional funds, you may be able to take out a bigger home loan. These newly-borrowed funds can generally be used for whatever purpose you have in mind. If you don’t have an immediate plan to spend them, you could leave them in an offset account or may be able to repay them into your loan, using a redraw facility to access them later.
What happens when you refinance with the same bank or lender?
Want to refinance to a different loan product with the same lender? This is known as refinancing internally. You may wish to refinance internally for a number of reasons, like changing from a variable rate to a fixed one, or from an investment home loan to an owner-occupier one. You may even wish to access the equity you’ve built up in your home while sticking with your current lender.
Refinancing internally is usually a fairly straightforward process, as your lender has already approved your current loan and has a good understanding of your financial situation.
What are break costs?
When refinancing a fixed rate home loan, you may need to pay what’s called a break cost of a break fee.
Break fees are designed to compensate the lender for any loss of profit it faces as a result of you breaking the terms of your fixed contract; including administration and its own wholesale borrowing costs.
Before breaking out of a fixed rate home loan, it’s important to understand exactly how much you might need to pay in break fees. Factor this into your decision-making. If you’re only a short time into your fixed term, break fees may be particularly expensive and could potentially cancel out any savings you stand to make by switching to a new home loan.
What should you watch out for when refinancing?
Refinancing your home loan may lower your repayments, but it might not necessarily reduce how much interest you pay over the long-term. That’s because the default home loan term for most lenders is 30 years, and some lenders will only refinance with a new 25 or 30 year loan term, notes the Federal Government’s Moneysmart website.
This could see you facing a longer term than the time remaining on your current loan and, the longer you’re paying off a mortgage, the more you’ll pay in overall interest. Negotiating a loan term that’s similar to the time remaining on your current one is typically recommended. If that’s not possible, you might consider paying more than your minimum repayments to shrink your balance faster.
For older borrowers, the 30-year default loan term can mean the way refinancing works is slightly different. If you’re aged 55 or above, lenders will typically look for an exit strategy, like downsizing your home, as a means to pay off the home loan when you retire.
Should I refinance my home loan?
The decision to refinance is a very personal one, and whether it’s right for you will depend on what you want to achieve by switching to a new loan.
Refinancing can be an opportunity to save on loan interest, as many lenders offer their best rates to new customers. A lower interest rate can also trim your regular repayments, putting more cash back into your pocket.
Refinancing can also help you tap into features that aren’t available with your current loan, like an offset account, or the option to split your mortgage and use both a fixed and variable rate.
There can be other reasons to refinance, like consolidating multiple debts into your home loan to help streamline your finances. But remember, consolidating debt into a mortgage could mean converting short-term debt into one you may hold for decades and that uses your home as security. This often means paying more interest in total and, as Moneysmart warns, you risk losing your property if you default.
Or you may choose to refinance to tap into home equity to pay for the likes of home renovations or to invest in another property.
What matters is you consider if refinancing your home loan is the most suitable option for your goals.
