How to refinance a home loan, step by step

Refinancing means replacing an existing home loan with a new one, either at a different lender or with a different product at the same lender. The mechanics are well established, the costs are modest, and for a borrower whose rate has drifted above the market the savings are usually the largest available from a single financial decision.

It is not automatically worthwhile. The decision depends on the rate difference, the remaining balance and term, the costs of switching, whether mortgage insurance would be payable again, and what the borrower does with the saving. This article sets out the process, the arithmetic and the points at which refinancing goes wrong.

Reasons to refinance

• A lower interest rate. The most common reason, and usually the largest single effect.
• A lower loan to value ratio. A borrower whose ratio has fallen below 80, 70 or 60 per cent may be entitled to a better pricing tier than their current lender is applying, as the guide to the loan to value ratio explains.
• Access to features. An offset account, unlimited extra repayments or a split facility, discussed in the comparison of offset accounts and redraw facilities.
• Consolidating debt. Moving higher rate debt into a mortgage reduces the interest rate but extends the term, which can increase total interest despite the lower rate.
• Releasing equity, for renovations or an investment deposit.
• Removing a guarantor, once the ratio permits it.
• Changing the loan structure, for example moving from interest only to principal and interest, or separating an investment portion.
• A fixed term ending, which is the moment a loan commonly reverts to a higher revert rate.

The arithmetic

The following figures are illustrative only. Assume a balance of $520,000 with 25 years remaining, currently at 6.55 per cent, refinancing to 5.95 per cent, with switching costs of $1,100.

Measure	Result
Current monthly repayment	$3,527
New monthly repayment	$3,334
Monthly saving	$193
Saving over the remaining 25 years	$57,855
Net of switching costs	$56,755
Break-even point	About 6 months

A rate reduction of 0.60 percentage points recovers the switching costs in under six months. That is the usual position: switching costs are small relative to the interest on a large balance, and the common objection that refinancing is not worth the trouble rarely survives the arithmetic. The refinance calculator tests other combinations.

The saving can be considerably larger if the borrower keeps repayments at the old level rather than taking the reduction as cash. On the same figures, maintaining a $3,527 repayment at the lower rate clears the loan in about 22.2 years instead of 25, and reduces total interest from about $538,202 to about $416,296, a difference of roughly $121,906. The rate change produces $57,855; the decision not to spend it produces the rest.

The term reset trap

A new loan is usually written over a new term, commonly 30 years. A borrower five years into a 30 year loan who refinances to another 30 year term has quietly added five years of interest.

On the figures above, refinancing the $520,000 balance to 5.95 per cent over 30 years rather than the remaining 25 reduces the monthly repayment to about $3,101, which looks better, but total interest rises from about $480,348 to about $596,348. Resetting the term costs roughly $116,000 while appearing to save $233 a month.

The remedy is simple and is usually available on request: ask for the new loan to be written over the remaining term rather than a fresh 30 years, or take the longer term for flexibility and set the repayment manually at the higher level. The mortgage payoff calculator shows the effect of each choice.

The process, step by step

1. Establish the current position. The current rate, balance, remaining term, product type, fixed or variable, any fixed rate expiry, and whether an offset or redraw balance is held.
2. Ask the existing lender for a better rate first. This costs nothing, takes one telephone call, and frequently produces a reduction, because retaining a customer is cheaper than acquiring one. A repricing requires no valuation, no application and no fees. If the answer is satisfactory, the process ends here.
3. Compare the market. Compare the rate, any annual package fee, whether an offset is included, and the comparison rate, keeping in mind its limitations as set out in the guide to comparison rates.
4. Obtain an indicative valuation. Many lenders provide an upfront valuation before a formal application. This matters because the refinance loan to value ratio rests entirely on the new lender's valuation, with no purchase price to anchor it.
5. Apply. The new lender assesses serviceability afresh, applying the buffer required by the Australian Prudential Regulation Authority of at least three percentage points above the product rate.
6. Formal approval and loan documents. Documents are issued for signature, and identity must be verified.
7. Discharge authority. The borrower completes the existing lender's discharge authority form, which every borrower on the loan must sign. This step is the most common cause of delay.
8. Settlement. The two lenders settle through the electronic lodgement network. The old loan is repaid and discharged, the new mortgage is registered, and any balance is paid to the borrower.

How long it takes

Four to six weeks from application to settlement is a reasonable expectation, although it can be faster where the borrower is well prepared and slower at busy times.

The discharge is usually the constraint. Lenders commonly quote around two to three weeks from receipt of a completed discharge authority, and some take longer. Because the discharge authority can generally be lodged before the new loan is formally approved, submitting it early is the single most effective way to compress the timeline. The risk of lodging it too early is minimal, since a discharge cannot proceed without a settlement booking.

Borrowers should also be aware that a discharge authority signed by only one of two borrowers will not be actioned, and that lenders usually require the form to be signed in wet ink or through a specified digital process.

What it costs

Switching costs are generally modest. The usual items are:

• A discharge or settlement fee charged by the outgoing lender, typically a few hundred dollars, and waived by some lenders.
• Mortgage discharge and registration fees paid to the state land titles office, generally $150 to $250 for each instrument and indexed annually.
• An application or establishment fee at the new lender, frequently waived on a refinance.
• A valuation fee, commonly absorbed by the new lender.
• Break costs if the existing loan is on a fixed rate, which can be very large and are calculated by reference to movements in wholesale rates, as explained in the guide to fixed rate break costs.
• Lenders mortgage insurance, if the new loan exceeds 80 per cent of the new lender's valuation. This is not transferable between lenders, so it would be paid again in full, as the guide to lenders mortgage insurance explains.

The last two are the items that most often make refinancing uneconomic. A borrower on a fixed rate, or above 80 per cent, should establish both figures before doing anything else.

Cashback offers

Lenders periodically offer cash payments to refinancing borrowers. These are real money, and on a straightforward switch they can more than cover the costs. They are also a marketing device, and a cashback attached to a rate that is 0.30 percentage points above the market is worth less than it appears within two years on a typical balance. The assessment should compare the total cost over three to five years rather than the headline payment, as the guide to refinance cashback offers sets out.

When refinancing is not the answer

• When the existing lender will reprice. A repricing achieves much of the benefit with none of the cost or effort. Ask first.
• When the loan is fixed. Break costs frequently exceed several years of savings.
• When the ratio is above 80 per cent. A second mortgage insurance premium usually outweighs any rate benefit.
• When income has changed. A new lender assesses serviceability afresh. A borrower whose income has fallen, or who has become self-employed since the original loan, may not qualify. Remaining with the existing lender and repricing avoids a fresh assessment.
• When the balance is small or the term nearly complete. The interest saved may not justify the disruption.
• When the property has fallen in value. A lower valuation may push the loan into a worse pricing tier or into mortgage insurance.
• When consolidating short term debt would extend it over 30 years. The rate falls and the total interest may rise.

Refinancing an investment loan

Two additional considerations apply. The first is loan purpose: interest is deductible according to what the borrowed funds were used for, not which property secures the loan. Increasing an investment loan to fund a private purpose creates a mixed purpose loan requiring apportionment for its remaining life, so any equity release should be taken as a separate split.

The second is that investment lending is priced above owner-occupier lending and assessed more conservatively, with rental income commonly accepted at 70 to 80 per cent of gross rent. A registered tax agent should confirm the deductibility position before a structure is changed. The investment property section provides further background.

Why existing borrowers drift above the market

Refinancing exists as an industry because rates on existing loans tend to rise relative to rates offered to new customers, without the borrower doing anything.

The ACCC's Home Loan Price Inquiry examined this directly. Its interim report in 2020 found that new customers were paying on average 26 basis points less than existing customers on owner-occupied loans, and that borrowers who had held a loan for more than five years were paying around 40 basis points above the rate on newer loans. The final report later that year found that older loans were on average around 58 basis points above the average rate for new loans, and that borrowers with loans more than 10 years old were paying on average roughly 104 basis points more.

The mechanism is not complicated. Discounts are negotiated at origination and are not usually reviewed afterwards. When a lender reduces its advertised rates to attract new business, existing customers on older discounts do not automatically receive the benefit. The gap widens quietly, year by year, and is only closed when the borrower asks or leaves.

This is why the first step in the process is a telephone call to the existing lender rather than an application elsewhere, and why the call is worth repeating every year or two regardless of whether anything appears to have changed. The guide to the cost of remaining with an existing lender examines the pattern in more detail.

Documents to have ready

A refinance is assessed like a new application, and having the following prepared shortens it considerably:

• recent payslips, or two years of tax returns and financial statements for a self-employed borrower;
• the most recent statements for the existing home loan, usually six months;
• statements for every other loan, credit card and buy now pay later arrangement;
• three months of transaction account statements;
• council rates notice and, for an investment property, the lease and rental statement;
• building insurance details, since the new lender must be noted as an interested party;
• identification documents for the verification of identity process.

A practical checklist

1. Obtain the current rate, balance, remaining term and any fixed rate expiry date.
2. Telephone the existing lender and ask for a rate review, referring to current market rates.
3. If the answer is unsatisfactory, compare alternatives on rate, fees and features rather than rate alone.
4. Obtain an upfront valuation before applying, to confirm the loan to value ratio.
5. Confirm any break costs and whether mortgage insurance would apply.
6. Request the new loan over the remaining term, not a fresh 30 years.
7. Lodge the discharge authority early, signed by every borrower.
8. After settlement, keep the repayment at the old level rather than taking the reduction as cash.

This article is general information and not personal advice. Rates, fees and lender policies change, and the figures used are illustrative. Borrowers who would like their current loan compared against the market may request a free assessment from an accredited broker, or read the refinancing section.