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What is home loan refinancing?
Refinancing your home loan is when you switch your current home loan to a different lender — usually to get a lower interest rate. This reduces your loan repayments and can help you repay your mortgage sooner.
Australian homeowners generally refinance their mortgage after 5.6 years of purchasing their property, according to settlement platform PEXA.
How does refinancing work?
Mortgage refinancing involves getting a new home loan to pay off your existing mortgage. While it often means switching to a different lender, you can also refinance with your current lender by switching to another loan product — usually with a better repayment structure or to access certain features your current mortgage doesn’t have, like an offset account or redraw facility.
When you refinance, your existing home loan is closed and your remaining balance is transferred to the new loan which you continue to repay. Most mortgage brokers advise reviewing your home loan every 12 months and refinancing your mortgage every 2-3 years.
Can you negotiate a lower rate with your current lender without refinancing?
You can always negotiate with your current lender to get a better rate on your home loan. This involves ‘repricing’ your current mortgage, instead of refinancing to a new loan product with a lower rate. According to our expert mortgage brokers, banks fight especially hard for home loans over $800,000. They recommend asking your lender to reprice your home loan before you refinance to another lender.
How much can you save by refinancing your mortgage?
Loan balance | |
Your existing mortgage | $600,000 |
Your refinance home loan | $600,000 |
Interest rate | |
Your existing mortgage | 6.35% p.a. |
Your refinance home loan | 6.00% p.a. |
Loan term | |
Your existing mortgage | 25 years |
Your refinance home loan | 25 years |
Minimum monthly repayments | |
Your existing mortgage | $3,995 |
Your refinance home loan | $3,865 |
Interest payable over the loan term | |
Your existing mortgage | $598,556 |
Your refinance home loan | $559,742 |
How much interest you'd save over the loan term | |
Your existing mortgage | Nil |
Your refinance home loan | Save: $38,813 (in total) That's $1,552 per year! |
| Your existing mortgage | Your refinance home loan | |
|---|---|---|
Loan balance | $600,000 | $600,000 |
Interest rate | 6.35% p.a. | 6.00% p.a. |
Loan term | 25 years | 25 years |
Minimum monthly repayments | $3,995 | $3,865 |
Interest payable over the loan term | $598,556 | $559,742 |
How much interest you'd save over the loan term | Nil | Save: $38,813 (in total) That's $1,552 per year! |
What to consider before refinancing
Why you’re refinancing
Have a clear understanding of why you’re refinancing. This will help your broker weigh up different loan types that best match your financial goals. Consider whether you want to refinance because you want:
- To get a cheaper rate
- More flexible home loan features
- To access equity to fund renovations or other projects
- To consolidate high-interest debts
- To increase or shorten your loan term
Refinance fees
Before you refinance, it’s important to conduct a quick benefit versus cost analysis, as there are usually some hefty costs involved. There may be discharge and break fees from your current lender, and application fees to establish your new home loan.
Here are some fees you may incur when refinancing:
- Discharge fees: $350 - $700
- Early exit fees: $350 - $700
- Fixed-rate home loan break costs: This is usually calculated as a percentage of the remaining unpaid interest, according to BOQ.
- Application fees to establish your new home loan: $150 - 500.
- Property valuation fees: $100 - $450
- Settlement fee: $150 - $450
- Mortgage registration fee: $350 - $650
Do you have at least 20% equity in your home?
If you refinance with less than 20% equity in your home, resulting in a loan-to-value ratio (LVR) exceeding 80%, you may have to pay LMI again – even if you've paid it before. LMI is not transferable between home loan products or lenders.
Why should you refinance your mortgage?
There are several reasons you may want to refinance your home loan, including:
To get a better interest rate
One of the most common reasons borrowers refinance their mortgage is to get a more competitive rate elsewhere. Banks tend to offer better rates and terms to new customers than existing ones.
Take advantage of a cashback deal
Some lenders offer cashback incentives to entice borrowers to refinance their loan with them. This can provide a quick cash boost to your savings, but it’s important to carefully evaluate the cashback loan terms.
Unlock your home equity
You can access the equity in your home by taking out a new loan with a higher loan balance than your current loan. The difference between the two loans is then paid out to you in cash in a separate account, which you could use to fund renovations, use as a deposit for an investment property or to pay for other expenses.
To consolidate debt
Home loan interest rates are generally lower compared to interest rates on credit cards and personal loans. You could refinance to roll all of your existing debts into your mortgage at a lower rate, with only one regular repayment to manage. While this would increase your loan balance, it could save you interest on those debts, although over a longer loan term.
Switch to a different home loan type
You can also refinance with your current lender to switch to a different loan type that offers better features, like an offset account or redraw facility. Or a home loan that allows you to make extra repayments without penalty.
You’re coming off a fixed rate
If you’re coming off your fixed rate term, and don’t want to automatically revert to your lender’s standard variable rate, you’ll need to refinance. You could refinance to another fixed-rate home loan or switch to a variable rate loan with more flexible terms and features.
To reduce or increase your loan term
Opting to refinance to a shorter loan term will result in higher repayments but decrease your interest payable over the loan term. On the other hand, increasing your loan term would decrease your monthly repayments, but it means you’ll pay more interest overall.
You’re not happy with your current lender
If you're dissatisfied with your current lender's internal processes or customer service, you might consider switching to another lender (ideally securing a better rate in the process).
How to refinance your mortgage
1. Compare loans & interest rates
Review the interest rates on home loan products from various lenders. This can give you an idea of what's available in the market and help you decide if it’s worth refinancing in the first place. Be sure to look at comparison rates, which reflect the overall cost of the home loan including both interest and fees.
2. Submit a mortgage application with the new lender
You’ll need to submit a home loan application with your new lender and your financial paperwork. Applying for a refinance is similar to the process you went through when initially purchasing your property (minus the contract of sale). You’ll generally need to provide the following paperwork:
- Two recent payslips
- A notice of assessment (NOA) from the ATO
- Bank statements for the last three months
- Statements of your current home loan and a payout figure
- Proof your property is insured
If you’re refinancing internally (staying with your current lender), your loan balance will be transferred across to your new loan product, one that hopefully comes with a better rate or features (ideally both).
3. Request a mortgage discharge form (if you’re refinancing externally)
If you’re refinancing externally, meaning with a new lender, you’ll need to sign and submit a discharge form with your current lender first. This is to remove your current lender from the title of your property.
After that, you’ll generally get a call from your lender's retention team to see if they can offer anything to keep your business. At this point, you can try to negotiate a better rate by mentioning the more competitive rate you found with another lender, although you may already be engaged in the refinance process.
4. Your lender will conduct a property valuation & credit check
Your new lender will conduct a credit check and request a valuation to determine the market value of the property securing the loan (your home). This can be a computer or physical valuation by an independent valuer. If you’re refinancing with your current lender, they will still require an up-to-date valuation. Your loan will be fully approved if the valuation is high enough that your LVR meets the loan eligibility criteria.
5. Your old loan is discharged & the new one is settled
Once your old loan is discharged, your new lender will coordinate with your existing lender to settle your new home loan by paying off your previous loan balance. Your old mortgage will be closed, and your new lender will have opened your new loan account with a new rate attached.