Refinancing a Home Loan: How It Works

What does refinancing a home loan mean?

Refinancing a home loan means paying out your existing loan and replacing it with another, hopefully, better deal from either your current lender or a different financial institution.

Mortgage refinancing is all the rage in Australia at the moment. As homeowners move to combat rising interest rates, owner-occupier refinancing between lenders rose 4.9% to $14.6 billion in July 2023, according to Australian Bureau of Statistics data — and that figure does not include refinancing with the same lender.

The banks and other home loan lenders are super keen to get in on this action. And while interest rates may have stabilised in the short term, there’s still no shortage of competition in the marketplace for your refinancing business.

Refinancing should not be an overly complicated process as long as you know what you want. Learn all you can, and talk to an expert if required. It also can be more straightforward if you refinance with your existing lender, given they approved your mortgage in the first place.

When can you refinance a home loan?

There’s no minimum period for mortgage refinancing in Australia, so technically, you can refinance the day after settlement on your mortgage. However, you might want to hold off doing so for at least a year or two, such as the associated costs and fees and the potential impact on your credit score.

There are also no restrictions on the type of mortgage you can refinance. This includes fixed-interest loans and interest-only loans, though there are usually additional fees and charges associated with refinancing these types of loans.

The length of the refinancing process will depend on which lender you go with. Some may get it done in just a few weeks, while others could take up to 60 days or more to approve your application and draw up the necessary paperwork. Typically, the entire process of refinancing a home loan will be expedited if you stay with your current lender.

Eligibility for refinancing a home loan

Technically, there’s no time limit on refinancing, so if you already have a mortgage, then you’re eligible. But this will depend on the terms and conditions set out by either your existing lender or your new one.

Unlike with your first mortgage, where you need to pay a deposit of 20% of the property’s value to avoid lenders mortgage insurance, you’ll need to have built up 20% equity in your property to avoid a charge if you want to refinance (see ‘costs of refinancing a home loan’ below).

Also, a prospective lender will likely consider your credit history and ability to make regular repayments like they did with your current mortgage.

There is also no limit on how many times you can refinance your mortgage. In fact, some people refinance every few years. There are, however, potential ramifications with your credit rating if you refinance too often.

Why refinance a home loan?

As a first homeowner, you’ll undoubtedly want to pay off your mortgage as soon and as cheaply as possible, leaving you with a valuable asset that you own outright. Refinancing can be a valuable tool in helping you achieve this goal and has a number of notable benefits as long as you’ve built up sufficient equity in your property.

These include:

A lower interest rate
Reduced fees and charges
Lower monthly repayments
Avoiding a high revert interest rate
Cash incentives
Extra features and facilities.

» MORE: Should I refinance my home loan?

Costs of refinancing a home loan

Mortgage refinancing is also accompanied by plenty of potential costs. Yes, there is lots of competition out there, and your new lender may be willing to dispense with some or even all of the fees listed below. Still, you need to be aware of them, as they could cost you $2000 or more in total.

Depending on the type of mortgage you currently have and the amount of equity you have obtained in the property, your costs could include some or all of the following:

Application fee

An application fee, which is also sometimes called an establishment fee or upfront fee, is payable when you apply for a loan and is usually not refundable if the application is turned down. The amount charged can vary widely, depending on the loan size you seek. An application fee in Australia could easily be around $500, but you could be asked to pay less or possibly more.

Break fee

If you currently have a fixed-rate loan and you refinance before the end of the fixed term, there is a high probability your current lender will charge you a penalty known as a break fee for terminating the contract early. The amount charged will once again depend on the size of your loan and the time left on the fixed part of the loan.

You’ll want to balance what you gain in refinancing before the end of the term, such as a new competitive fixed rate or lower fees, against the fee you’ll pay to refinance early.

Lenders mortgage insurance

Lenders mortgage insurance (LMI) is a cost usually associated with first homebuyers who don’t have a 20% deposit for the property they wish to purchase. However, it can also become payable when refinancing if you don’t have 20% equity in your property.

LMI can cost anything from a few thousand dollars to tens of thousands of dollars, depending on the size of your mortgage.

Switching fee

If you want to refinance your loan with your current lender, they may charge you a switching fee for replacing your current loan with another one. However, this is one of the fees you should be able to waive if they’re serious about keeping your business.

Discharge fee

When you close your current loan, your lender may charge you a discharge or termination fee to cover their administrative costs. This fee usually falls somewhere between $200 and $400.

Valuation fee

Most lenders require a valuation before agreeing to a refinance. A valuation or appraisal fee covers the costs of valuing your property, usually between $300 and $500, but can cost more.

Registration fee

A mortgage registration fee is designed to cover the cost of registering the lender’s mortgage on your property’s title and should only be payable if you change lender.

Ongoing fees

Most mortgages have some monthly or annual account-keeping or administrative fees, which may differ from the fees you currently pay on your mortgage.

Stamp duty

Stamp duty is generally only payable if the name on the property title changes, though you should check with your current lender if you’re staying with them or your new lender to be sure. Likewise, involving solicitors in the refinancing process or paying conveyancing fees may not be necessary.

Additional fees

Additional fees could include things such as title searches, title insurance and credit report charges. Before proceeding, check with the lender you wish to refinance with about these or any other hidden charges.

» MORE: Costs to know when buying a house