How to refinance a home loan

What are the steps to refinance a loan?

1. Confirm: the cost of your current home loan
2. Ask: your lender for a better deal
3. Compare: home loans from other lenders
4. Review: how much does it usually cost to refinance?
5. Apply: for the new home loan
6. Exit: your old home loan

What does refinancing actually mean?

Refinancing your home loan is where you take out a new home loan to pay off your existing debt. You can either refinance by taking out a loan with a new bank, or you can refinance to a new loan inside your existing lender.

For example, let's say you took out a home loan 5 years ago worth $600,000. You now have a home loan with a balance of $510,000. You could refinance and take out a new loan worth $510,000 (or more) and use this new loan to pay off and close your existing home loan. You'd then continue to make repayments on the new loan.

Why go to all of this trouble? To pay less for your loan, of course!

Step-by-step process for refinancing your home loan

1. Confirm: the cost of your current home loan

Make sure you know what interest rate you're already paying. If you don't know this off the top of your head, it should be listed on your home loan statement or you could log into internet banking to see your account information.

Be warned: The interest rates displayed on your lender's website may not be the same to what you're paying. In fact, it's likely to be much higher on their website. Banks are weird like this – they advertise rates that are often higher than the rates they actually charge.

🔥 Tip: Be sure to find out about any other fees or costs you're paying as part of your home loan, such as annual fees, since this will also factor into your cost analysis.

2. Ask: your current lender for a better deal

Call your existing lender and tell them you're thinking of refinancing. Specifically, ask for their retention team. They may be able to offer you a lower rate straight away, or you may need to come to them with a lower rate from another lender and say you're going to switch for them to price match.

Assuming you have been on time with your mortgage repayments, your lender will likely want to negotiate a better deal with you.

🔥 Tip: Here's a script so you know the exact questions to ask when you call your lender. Even if they come back with a better interest rate, continue to do your research to make sure you're not paying more than you need to!

3. Compare: home loans from other lenders

Using Finder's comparison table, look at what interest rates are on offer. Although you may see cheaper interest rates straight away, it's important to look beyond the headline rate. You should also look for the following:

• Fees such as high annual fees. The comparison rate will give you a better idea of how much you'll really be paying.
• Features such as offset accounts, redraw facilities and split loans.
• Flexibility such as being able to make additional repayments.

Expert insight: How often should you refinance?

"We always recommend waiting two years to consider refinancing, as this ensures that you have received enough benefit of the reduced interest rate to recover the cost of the refinance, which can be up to $1,000 per property. In the meantime, always ask your lender a) if they can give you a better rate and b) if they can waive your fees for the year. If you have a change in circumstances, it may be beneficial to refinance sooner, and a cashback loan can help with covering the costs of this."

Matt Turner

Mortgage broker, GSC Finance Solutions

4. Review: how much does it usually cost to refinance?

Once you've compared the home loans on offer and found a few that you think are right for you, consider the costs of moving to the new lender.

You can call your lender to see if you have to pay break fees. Most home loan lenders will levy a discharge fee if you want to leave your loan early. If you have a variable rate home loan, the exit fee should only be a couple of hundred dollars, but if you're breaking a fixed rate home loan that could be anywhere up to tens of thousands of dollars. If your exit fee is too high, it might cancel out the savings you'd be making from a lower interest rate.

You should also consider the costs associated with taking out the new loan, including the application fee, settlement fee and valuation fee. Whether they apply and how much they will cost will vary from lender to lender – and remember that some lenders may have introductory offers, so keep an eye out for those.

🔥 Tip: Figure out if you'll be forced to pay lenders mortgage insurance (LMI) again for your new loan. If your loan has a loan to value ratio of more than 80% (meaning your deposit or equity is less than 20%), then LMI is probably payable and it's very expensive, which likely cancels out any benefits of refinancing to a cheaper rate.

5. Apply: for the new home loan

Once you've reviewed the costs and picked the lender that's right for you, it's time to apply. Each lender has a different application processes, but many offer online applications. You can read more about the documents you'll need to apply here, but in general, you'll need to provide the following:

• Personal information
• Employment and income information
• Details of your current home loan
• Details of your property

Once you've applied, approval can take anywhere from 1 day to 8 days. Some online lenders may even be able to approve your loan within a matter of hours.

🔥 Tip: Any missing information or errors in your paperwork can delay your loan approval. Do your best to provide complete, accurate docs from the get-go – this includes up-to-date tax returns.

6. Exit: your old home loan

The good news? You don't have to do anything here! Your new lender will communicate directly with your old lender to discharge you from your old home loan. They will exchange all the necessary documents and take care of things like the title transfer. Once this has all been completed, you'll reach the settlement stage. Your funds will be disbursed to repay the old loan and you'll receive new account numbers and welcome packs from your new lender. If everything runs smoothly, you should be able to go from approval to settlement within 2 weeks.

🔥 Tip: You should do a health check on your home loan every 12-24 months to make sure you're on the best interest rate out there. Complacency here can cost you thousands!

Finder survey: How easy do Australians find it to refinance a home loan?

Do you get money when you refinance a loan?

It is possible to refinance to a new, higher loan amount and get extra cash out. For instance, in our example above, the borrowers took out a loan of $600,000 initially and they've paid it down to $510,000 over five years. Let's say, in that time, the property increased in value to be worth $800,000.

You now have equity of $290,000 ($800k - $510k). You could apply to refinance your existing $510,000 loan balance and take out more than this amount. You could use these extra funds to renovate, go on a holiday or buy a car.

What are the benefits of refinancing?

• 1. To switch to a lower rate
  

  Switching to a lower interest rate would lower your monthly repayments and therefore lower the overall cost that you'd pay over the life of the loan. You can work out how much you'd save using our repayment calculator.

• 2. To repay your mortgage faster

  If you refinance to a lower interest rate, but continue to pay the same in mortgage repayments, you'll pay down your loan a lot faster.

• 3. To access the equity in your home for additional money

  Equity is the difference between the amount you still owe on your home and its value. You can typically borrow up to 80% of your property's value, minus what you still owe on your loan. You might want to do this to fund home renovations or to purchase another property.

• 4. To get your finances back on track

  Refinancing your home loan can allow you to sort out your finances if your existing home loan is in arrears or you want to consolidate debt. On the other side of the scale, if you originally took out a bad credit home loan, you can refinance on to a better loan once you have your credit in order.

• 5. To unlock better features

  It's not only worth looking at better interest rates, refinancing to a new home loan could give you access to better features such as offset accounts, extra repayments or package features.

Looking to refinance? Compare your options now

Mistakes to avoid when refinancing

#1: Waiting too long to refinance

When rates are moving either up or down, you want to make sure you are on the best rate possible or you risk losing money. The longer you wait to refinance, the more money you could be losing out on.

#2: Adding years to your home loan

In some cases, it might be necessary to extend the length of your loan. But typically, if you sign up to another 30-year home loan when you refinance, you are pushing back the time until you are debt-free. This means you'll be paying interest for even longer and will likely end up paying more over time.

#3: Refinancing when your home value has fallen

While it's likely that your property has risen in value (depending on how long you've had the property for), there are some cases where properties fall in value. If you took out your original loan with a small deposit and haven't been making repayments for very long, you may find you haven't built up enough equity for 20% of the property's value – this may mean you need to pay LMI a second time.

#4: Being enticed by honeymoon offers

Some lenders will offer introductory rates as a way to entice borrowers. You should take a look at the lender's standard interest rate to see what you would be paying in the long run. Also take a look at the lender's comparison rate to see what the true overall cost of the loan will be.

#5: Not paying attention to the comparison rate

An interest rate might seem really good, but the comparison rate shows you what the true cost of the loan is once you add in any additional fees and charges.

More questions on how to refinance

• When should you not refinance your home loan?

  While every situation is different, there are a few times refinancing might not be a good idea:

  1. If the costs to leave your existing loan or to take out the new loan outweigh any savings you might get from the lower interest rate.
  2. If the new home loan doesn't have the features you want, such as offset accounts or the right flexibility.
  3. If you're planning to sell your property soon.
  4. If your home loan is small.
  5. You still owe more than 80% of the property's value.
  6. You want to access your home's equity.

• Can I refinance if my finances are bad?

  Refinancing in certain circumstances can be a bit tricky. Fortunately, no matter what your situation, there are likely to be lenders out there willing to give you a chance. Here are some common tricky refinancing situations:

  • Refinancing with bad credit
  • Refinancing when you need to consolidate multiple debts
  • Refinancing with negative equity

• What's the downside to refinancing?

  It can be time consuming and tedious to compile all the documents you need, and you may need to take extra steps like filing your tax return. But usually, these extra steps are worthwhile for the amount of financial benefit you gain.

• Does refinancing affect your credit score?

  Every time you submit an application for credit, it could affect your credit score. In theory, if you are successful in your refinancing application, it should not affect your credit score. Once your new loan has paid out your old loan, that old loan will be closed on your credit file.

  However, if your application is rejected or you apply for multiple home loans, then that will be recorded on your credit report. A couple of applications shouldn't have much of an impact, but if you repeatedly apply to refinance in a short space of time, that will show up as a red flag.

Written by

Rebecca Pike

Editor, Money

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Rebecca Pike is Finder’s money editor, with over 7 years of experience in mortgages and personal finance. A frequent TV and radio commentator, she frequently appears on Sunrise and 7News, Today and 9News, as well as Sky News, Channel 10 and across radio and print. Rebecca previously served as Editor of Mortgage Professional Australia. She has a Master’s degree in Journalism as well as ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products, which comply with ASIC guidelines. See full bio

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Rebecca has written 253 Finder guides across topics including:

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Co-written by

Sarah Megginson

Money expert + media spokesperson

Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards. See full bio

Sarah's expertise

Sarah has written 223 Finder guides across topics including:

• Home loans
• Personal finance
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• Managing the cost of living