Home Loan Refinancing: The Ultimate Guide

The great Australian dream is to own your own home. Many of us do, along with the bank. Your mortgage can be a burden, or with a bit of attention, something you actively manage.

This guide covers what it means to refinance your mortgage, six reasons people do it, the costs involved, the process itself, and answers to the questions that come up most often.

What does it mean to refinance your home loan?

Your home loan repayment is likely your biggest monthly expense. Circumstances change, and you may want to increase or decrease that amount.

Refinancing means replacing your existing home loan with a new one, either with your current lender or a different one. The new loan pays out the old one, and you continue with different terms: a different rate, a different length, different features, or a different balance.

Why refinance your mortgage?

There are six common reasons:

• Adjust your interest rate
• Access equity for improvements or expansion
• Consolidate debt to reduce monthly repayments
• Switch your rate between fixed and variable
• Find a better deal with more useful features
• Lengthen the period of your mortgage

Let’s take each in turn.

Adjust your interest rate

The most common reason to refinance is to get a lower interest rate. Lenders compete hardest for new business, which means the rate you were given when you signed up may no longer be the rate they offer today to someone in your position.

This is worth checking periodically rather than once. The gap between what existing customers pay and what new customers are offered is a well-known feature of the Australian mortgage market, and it tends to widen the longer you stay put.

Access equity

Equity is your property’s value less the balance of your mortgage. If your property has risen in value, or you have paid down a meaningful chunk of the loan, that equity can be released as cash when you refinance.

People use it for renovations, extensions, or a deposit on an investment property. Bear in mind you are converting equity back into debt, and paying interest on it for the remaining life of the loan.

Consolidate debt

Your mortgage may not be your only debt. Personal loans, overdrafts and credit cards can push your total monthly repayments high.

Folding those into your mortgage means one payment at a lower rate, which is easier to manage. The catch is the term: a credit card balance moved onto a 25-year mortgage can cost far more in total interest, even at a lower rate. It works best if you keep paying extra rather than settling into the lower minimum.

Switch between variable and fixed rates

You may have fixed your rate when you took out the loan and now want the flexibility of a variable one, or you may want the certainty of knowing exactly what you pay each month.

Both are legitimate, and which is better depends on your circumstances and your tolerance for movement in your repayments rather than on any universal rule. Check for break costs before switching out of a fixed rate, since these can be substantial.

Get better loan features

Does your current mortgage come with any useful features? If it does not offer the following, and one or more would suit you, that alone can justify a switch.

Repayment holiday

Temporarily stop or reduce your repayments without a penalty, for circumstances such as parental leave or a period out of work.

Flexible rate options

If you cannot decide between fixed and variable, split the loan and do both. Some lenders also allow an interest-only period.

Redraw facility

If you have made additional repayments and later need cash, a redraw facility gives you access to those extra funds.

Loan portability

Buying and moving to a new home? Portability lets you take your loan with you rather than paying to set up a new one.

Offset account

On a variable rate, interest is calculated on your loan balance. A linked transaction or savings account is offset against that balance, so the money sitting in it reduces the interest you pay.

Pay it off faster

If you are in a position to make extra repayments and cut years off the loan, check whether your lender penalises you for it. Some do. Refinancing to one that does not can be worth it on its own.

Increase the life of the loan

You may have a 25-year loan and need lower repayments. Extending to a 30-year term reduces your monthly commitment, at the cost of more interest over the full life of the loan.

Once you have decided a refinance makes sense, the next thing to understand is what it costs.

What does it cost to refinance your mortgage?

There are several fees involved. Plan carefully so the cost of switching does not exceed the benefit. Expect four categories of charge:

• Borrowing costs
• Government fees
• Lenders mortgage insurance
• Exit fees

Borrowing costs

There are usually fees to establish a new loan. Some are negotiable or waived. The three most common:

Application fee

Charged for new loans. Lenders will often waive it to win your business, so it is always worth asking.

Settlement fee

A processing fee your new lender may charge to pay out your existing mortgage.

Valuer fee

Your new lender may engage a third-party valuer to establish your property’s current value, and pass that cost to you.

Government fees

Government fees are difficult to avoid. Two are likely:

Mortgage registration fee

Imposed by the Land Titles Office on both new and refinanced loans.

Stamp duty

You paid this on your original loan. Any top-up amount may be subject to it again. Rates and thresholds vary by state and territory.

Lenders mortgage insurance

Lenders mortgage insurance protects the lender, not you, if you default. It applies when you borrow more than 80% of your property’s value.

It is not transferable between lenders, so refinancing above that threshold means paying it again. In some cases it can be added to the loan amount rather than paid upfront.

Exit fees

Some older loans carry significant exit fees designed to discourage switching. Check your mortgage contract so the cost of moving does not cancel out the benefit.

How to refinance a home loan

Start by choosing a lender. It makes sense to contact your existing one first and ask what they can do, since retaining you is cheaper for them than acquiring someone new. If the answer is unsatisfactory, shop around or use a comparison service.

The rest is much like your original application. Make an appointment with your lender or broker, provide the documents, and be ready to pay the applicable fees.

What documents will you need?

Broadly the same documents you provided for your first home loan:

• 100 points of identification, typically passport and driver licence
• Current income details: employment contract, your two most recent payslips, and your latest tax return and notice of assessment
• A complete record of your other debts, such as credit card and loan statements
• Your latest council rates notice
• Evidence of building insurance on the property

It’s time to do a home loan checkup

Your mortgage is likely your largest debt. If you have held the same one for several years without reviewing it, it is worth a look. If your rate is meaningfully higher than what lenders currently advertise to new customers, your loan has fallen behind the market.

Circumstances change, and you may now be in a position to increase or decrease your repayments. Either is a reason to review.