What refinancing is
Benefits of refinancing
What to look out for
How to refinance your home loan
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.
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
- A 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:
- Lower rates and fees
- Releasing equity
- Better loan features and structure
- Improved personal finances
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.
Learn more about home loan interest rates.
Refinance home loan savings example
|Existing Home Loan||REfinance Home Loan 1||Refinance Home Loan 2|
|Home loan principal amount||$500,000||$500,000||$500,000|
|Total interest and fees||$308,280||$283,371||$211,218|
|Total savings from refinancing**||N/A||$24,909||$97,062|
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.
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.
Example of refinancing a home loan to release equity
|Existing home loan||equity refinance home loan 1||equity Refinance home loan 2|
|Home loan principal amount||$250,000||$350,000||$400,000|
|Remaining equity||$250,000 (50%)||$150,000 (30%)||$100,000 (20%)|
|Available funds post-refinancing||N/A||$100,000||$150,000|
|Monthly repayment amounts||$1,054||$1,476||$1,686|
|Total interest cost over term||$129,444||$181,221||$207,1110|
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.
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 cheque 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). Learn more about interest-only home loans.
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 include:
- 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 secret to reducing risk when refinancing is 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.
Use our home loan calculator to estimate home loan repayments.
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
|Discharge fee||$100 - $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 fee||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 fee||$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.|
|LMI||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 fee||$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 of refinancing, 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.
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 will benefit you the most. Here are 5 steps to refinancing your home loan:
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 financial adviser and mortgage brokers for help and advice on making the decision.
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.
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).
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 lender websites for detailed information about available loan products, fees, and current rates.
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.
Refinance home loan cost of switching vs savings
|Existing Home loan||Refinance home loan 1||Refinance home loan 2|
|Home loan principal||$500,000||$500,000||$500,000|
|Annual savings (minus fees)||$0||$54||$1,385|
As you can see from the above example, even if you can secure a better interest rate and reduce your repayments, the cost of refinancing may outweigh any savings you could gain.
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.
Refinancing is the process of securing a new home loan to pay off the other. 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 usually done to switch to a new loan with:
- Lower interest rates
- Lower fees
- A more suitable structure
- Better features
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.
Refinance home loan FAQ
What does refinancing a home loan 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.
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.
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.