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Refinance Home Loan

Written by

Shaun McGowan

Homeowners can refinance a home loan for a number of reasons. Refinancing is primarily used to secure a lower interest rate or a more suitable home loan. It’s important to understand the refinancing process to avoid high fees or taking on a more-expensive mortgage.

In this guide you’ll learn:

  • What refinancing is
  • Common reasons for refinancing
  • The risks of refinancing and how to minimise them
  • How to compare home loans when refinancing
  • Common refinancing fees
  • How to refinance your home loan

What is a refinance home loan?

Refinancing is the process of securing a new mortgage to pay off your existing one. There are several reasons to refinance but the two most common are:

  • Getting a better deal on your home loan
  • Change in personal financial circumstances, which requires you to take out a different mortgage

Often refinancing is with the same lender but it can be with a different one as well. The home loan market in Australia is competitive - if your current lender won’t give you a better deal, there are usually several others who will.

However, refinancing is not right for everyone, and it’s important to understand the process and pros and cons of refinancing before making a decision.

Top 4 benefits of refinance home loans

Before you refinance you should be certain you’ll benefit from doing so. To weigh up the decision, start by comparing possible benefits with possible costs and risks.

The most common benefits of refinancing your home loan include:

Find out about the different types of home loans available with Money Matchmaker

1. Lower interest rates and fees

One of the most common reasons to refinance is to switch to a cheaper home loan, with lower interest rates, or fees, or both. Even a small decrease in your interest rate and fees can save you thousands of dollars over the life of your home loan.

Refinance home loan savings example

Current home loanRefinancing home loan option 1Refinancing home loan option 2

Home loan amount (principal)

$500,000

$500,000

$500,000

Comparison rate

3.5%

3.25%

2.5%

Monthly repayment

$2,245

$2,176

$1,976

Total interest and fees payable

$308,280

$283,371

$211,218

Savings from refinancing**

$24,909

$97,062

*Examples assume a 30-year loan term. ** Figure does not include the costs of refinancing. ***Learn more about home loan interest rates

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When comparing your current home loan to another always use the comparison rate and not the interest rate as the comparison rate includes total fees.

2. Releasing equity

Your equity is the difference between your home loan amount and the value of your home. When you first buy your home your equity will be equal to your deposit amount, but in time your home’s value will go up and you’ll make mortgage repayments which will increase your equity.

In some cases, you may be able to access this equity and free up cash by refinancing your mortgage. Common reasons to release equity include:

  • Investing in property or other assets.
  • Home renovations.
  • Paying for other expenses such as holidays or a new car.

Keep in mind when you release equity you’re not getting free money. The bank is just extending your mortgage to provide you with cash, which means your repayments may increase, along with the total cost of your loan.

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Before refinancing to release equity, always make sure you’re aware of what the extra costs will be and make sure that you can afford them without causing financial stress.

How much equity can I release from my property?

The maximum loan to value ratio most banks will allow is 80%. That means when you refinance you’ll need to leave at least 20% equity in your property, and that you may be able to release or access anything over that.

For example, if you have 30% equity in your property you could be able to access up to 10% - If you have 40% equity you could be able to access 20%, and so on.

Refinancing can free up a lot of cash to cover other costs or invest. But depending on how much equity you release, your repayments and total interest cost can increase by a considerable amount.

Example of refinancing a home loan to release equity

Original home loanHome loan 1 refinance & equity releaseHome loan 2 refinance & equity release

Value of property

$500,000

$500,000

$500,000

Loan amount (principal)

$250,000

$350,000

$400,000

LVR

50%

70%

80% (maximum)

Remaining equity

$250,000 (50%)

$150,000 (30%)

$100,000 (20%)

Cash amount released available to use after refinancing

$100,000

$150,000

Monthly mortgage repayment amount

$1,054

$1,476

$1,686

Total interest cost over life of loan

$129,444

$181,221

$207,110

3. Better loan features and structure

There is much more to your home loan than your interest rate. There are also several features and loan structures available that could help you pay less interest and fees and/or pay your home loan off faster.

  • Offset account Links your savings account to your loan to reduce interest charges. Interest is calculated on the loan amount minus the amount in the savings account.
  • Redraw facility Allows you to withdraw any additional payments that exceed the minimum repayment amount as needed. For example, if you pay $200 extra every month after 12 months you will be able to access $2,400.
  • Split rate interest A portion of your loan has a fixed interest rate, while the rest is variable. The fixed portion protectors you if interest rates rise and you’ll be able to make extra repayments without being charged a fee.
  • Package discounts In some cases, if you bundle several services with your lender (like insurance, credit cards and chequing accounts) they’ll offer discounts and waive certain fees.
  • Interest-only Switching to interest-only payments reduces your repayment amount for a set period of time (usually six months to five years).
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If your current loan doesn’t have the features you want, refinancing can be a great way to secure a more suitable home loan.

4. Improve your finances

Refinancing can be a great way to improve your financial circumstances or to get yourself out of financial difficulty. Before making any changes you should always speak to your lender or a financial advisor.

  • Refinancing to consolidate debt If you’ve got a number of other high-interest debts like credit cards and personal loans you may be able to consolidate them into your home loan. This will not only make the debt easier to manage by rolling it into one repayment, but it could also reduce your interest costs. That’s because credit cards and personal loans can have interest rates of up to 25% whereas home loan rates are as low as 2.19% at the time of writing.
  • Refinancing in arrears if you’ve fallen behind on your home loan repayments talk to your lender right away to ask for support. In most cases, they’ll agree to reduce your home loan repayments until you’re back on your feet. If they don’t or if what they offer isn’t enough some specialist lenders may be able to help refinance your loan and offer terms that work for you.
  • Refinancing a bad credit home loan If you had bad credit when you first applied for your home loan there’s a good chance you’re paying high fees and interest rates. If your credit score has improved since then you may be able to refinance to lock in lower rates and fees.

Learn more about bad credit home loans.

Reducing the risks of refinancing

Refinancing isn’t for everyone. Before making any changes to your loan weigh the costs and the benefits to make sure refinancing is the right option for you.

The risks of refinancing are that:

  • Your new loan ends up being more expensive than your current loan
  • The fees for exiting your current mortgage and securing a new one exceed any savings you make.
  • Your new loan is less suitable than your current loan

The secrets to reducing risk when refinancing are simple:

  • Get expert advice.
  • Compare interest rates, fees and features of your current loan and your old loan before switching.
  • Be aware of any fees for discharging your old mortgage and securing the new one and include them in your comparison.

If you don’t take care when refinancing you may end up spending hours or days arranging your new loan, only to incur more fees than you might have if you hadn’t.

What does Business Insurance cover

Refinancing fees and costs

Before refinancing you should be fully aware of all fees that will be charged when you do - both by your current lender and your new lender.

Refinance Home Loan Fees and Costs

Fee nameCostDescription

Discharge fee

$100 to $1,000

Charged by your lender for discharging your mortgage.

Stamp duty

Usually 0.35% of the mortgage amount - varies between states.

Tax paid on property purchases in Australia - also levied on mortgage transfers in some situations.

Application fee

Up to $1,000

Charged by your new lender to cover time preparing and reviewing applications.

Break fees

Depends on your loan - can be thousands of dollars.

Charged your existing lender if you break your fixed-rate period.

Valuation fee

$250 to $600

Charged by your new lender to cover costs of valuing the new property if necessary.

Settlement fees

$100 to $500

Charged by a new lender to cover costs of settling the loan with your old lender.

Mortgage registration fee

$100 to $180

Charged by the state government.

Lenders mortgage insurance

Varies depending on your loan

May be charged if your property has decreased in value since you bought it and your LVR is over 80%.

Exit fees

$1,000 to $6,000

Illegal as of 1 July 2011. If you took out a loan before this date your lender may charge this fee when you exit your loan.

The mortgage lending sector is extremely competitive and lenders will fight over your business. As a result, when you refinance new lenders may be willing to waive fees and pay mortgage cashback to help cover your original lender’s fees.

Learn more about home loan fees and repayment options.

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Mortgage cashback is a lump sum payment made to you by a lender when you establish a new home loan. It varies from $1,000 to $3,000 or more.

How to refinance your home loan

If you’re ready to refinance the process is usually straightforward. The hard part is choosing which loan and lender to switch to.

1. Decide whether refinancing will benefit you

Before you start talking to lenders decide whether or not refinancing will benefit you. Signs refinancing could benefit you include:

  • Your current interest rate is higher than the market rate.
  • You’re paying high fees.
  • You don’t have the loan features and/or structure you need.
  • You need to access extra cash by releasing equity.
  • You’re struggling with mortgage repayments or want to consolidate debt.

If you’re not sure whether or not refinancing is a good idea speak to an expert advisor like a mortgage broker for help making the decision.

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2. Talk to your current lender about getting a better deal

The first thing you should do when you’re ready to refinance is speak to your current lender. Provided you're a low-risk borrower who makes repayments on time, they may be willing to drop their rates or offer better terms to retain your business.

To broach the topic simply call or email your lender and tell them you’re going to refinance your loan to another lender. If you want a better interest rate or lower fees, prepare by researching and checking what competing lenders are offering so that you can quote those amounts when negotiating.

In most cases, your lender will drop their rate and waive fees to keep your business (even if they are you should still compare the alternatives to make sure you get a good deal).

What types of lenders offer home loans?

3. Compare home loan alternatives and lenders

When comparing home loans always look at the comparison rates and consider the features they include. Comparison rates include both fees and interest so they represent the true cost of the home loan.

When comparing lenders read customer reviews online and check their websites for more information.

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4. Consider all of the costs

When you’ve chosen a lender and a loan product you think will be suitable, compare the costs of staying with your home loan with switching. If there’s not much difference, think about whether switching is worth the time and the trouble.

As you can see from the example below, even if you can secure a better interest rate like option 1 you may not save enough to make refinancing worthwhile.

What are the fees and repayment options for home loans?
Current home loanRefinancing option oneRefinancing option two

Home loan amount

$500,000

$500,000

$500,000

Comparison rate

3%

2.3%

2%

Years remaining in fixed period

1

Refinancing costs

$2,200

$1,800

Yearly repayment amount

$25,510

$23,256

$22,325

Total savings during the year (after fees)

$0

$54

$1,385

5. Apply for a new home loan

Once you’ve compared lenders and home loans to find the most suitable home loan for you it’s time to apply for a new home loan. Some lenders have fully online application processes while others will require you to visit their offices to sign documents - to get started simply visit your chosen lender’s website or contact them and enquire.

They’ll handle most of the hard stuff, including liaising with your old lender to transfer your loan.

Learn more about applying for a home loan.

Documents you'll need for home loans - proof of identity

Summary

Refinancing is the process of securing a new home loan to pay off the other. It’s usually done to switch to a new loan with:

  • Lower interest rates
  • Lower fees
  • A more suitable structure
  • Better features

In some cases, refinancing can save you thousands of dollars and make repaying your home loan easier. But before you refinance you need to do some work comparing other loans on the market to your current home loan to make sure the switch will save you money.

It’s particularly important to understand the cost of refinancing and all of the fees involved. In some cases, the cost of refinancing may outweigh any savings you make by securing a lower interest rate. That’s why it’s important to spend time comparing home loans and their fees, and/or seeking the help of a mortgage broker or financial advisor if you’re not sure.

Before you refinance you should also talk to your current lender to see if they’ll offer you a better deal to keep your business.

Refinancing your home loan FAQ

What does refinancing mean?

Refinancing is the process of paying off your existing mortgage by securing a new one. It’s usually done to switch to a home loan with better rates, lower fees or more suitable features.

Should I refinance my home loan?

Whether or not you should refinance your home loan depends entirely on your circumstances and the home loan itself. If you’re not sure whether or not you should refinance it’s always best to speak to an expert like a financial advisor or mortgage broker before making any big decisions.

Will I be charged fees for refinancing my home loan?

Yes, usually you will be charged fees when refinancing, both by your existing lender and your new lender. In some cases, your new lender may waive fees or provide incentives to cover fees in order to win your business.

What are the risks of refinancing?

The main risks of refinancing are that changing to a new home loan costs you more money than it saves you, or that your new loan is less suitable. To minimise these risks do extensive research before switching, understand all the costs and get advice if you need it.

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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