Refinancing your mortgage

Home owners are a diverse group of people, and that means there is also a whole variety of reasons why you may be thinking about refinancing.


What is refinancing?

Quick answers: what's involved in refinancing a home loan?

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Replacing your current home loan with a new one
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Receiving additional or better features
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Exit fees and borrowing costs to consider
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Offering savings on interest

Is refinancing worth the fuss?

Refinancing refers to the process of paying out your current home loan by taking out a new loan, either with your existing lender or through a different lender.

Here Joel Gibson, Money-saving expert & author of Kill Bills!, explains the process of refinancing and explains how refinancing can help save you on your home loan.

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Benefits of refinancing

There can be some fantastic benefits in refinancing your home loan - just make sure you also weigh up the different expenses outlined below that can be involved in the transfer to make sure it’s the right choice for you.

Why refinancing a home loan can be a sensible step

If you’re keen to secure a better interest rate or enjoy more loan features, refinancing your home loan can be the solution. Refinancing is also an opportunity to get control of debt or tap into any home equity you’ve built up.

The most popular reason home owners choose to refinance a home loan is to secure a lower interest rate and reduce their monthly repayments. However, refinancing can come with some costs, so it's essential to weigh up the savings of refinancing against the expense involved.

If you'd prefer the certainty of repayments will stay the same for a period of time, you may wish to switch to a fixed rate. Refinancing your home loan lets you do this. Or, you may decide you'd like to take advantage of a lower variable rate as you can accept the risk that rates may rise in future.

Your home is likely to be one of your most valuable assets, and by harnessing home equity you have the opportunity to build additional wealth or simply achieve personal goals. Find out more about accessing your home's equity.

Like many Australians you could have several debts – probably a home loan, a personal loan, and possibly even a credit card balance. Having multiple debts means juggling lots of different repayments.

Refinancing your home loan can provide an opportunity to streamline your debt, and potentially reduce the overall interest you're paying on multiple debts through the process of 'debt consolidation'. It means folding several high interest debts into one lower rate debt – which could be your home loan - and this may reduce your total monthly repayments.

However, it's important to note that debt consolidation can come with some downsides. It can turn a short term debt like a personal loan into a long term debt (your mortgage), and that means paying interest on the balance for a much longer period which could cost you more in the long run.

For debt consolidation to be truly cost effective, you need to commit to making additional repayments to pay off the enlarged loan as quickly as possible.

Flexible repayments

Making extra repayments at no additional cost to help pay off the loan sooner.

Repayment holiday

A break from repayments or reduced repayments to cover career changes or breaks e.g. maternity leave.

Offset account

Having a savings or transaction account linked to your loan. The balance of the linked account is deducted from, or offset against, the balance of your loan when the monthly interest charge is calculated.

Redraw facility

Enabling you to withdraw any additional repayments you have made on your loan. Handy if you need cash in an emergency.

Flexible rate options

Dividing your rate between fixed and variable components, or even making interest-only payments for a period.

Loan portability

The ability to take your loan with you when you move from one home to another without the expense and hassle of arranging a new loan.

Refinancing costs

Depending on your circumstances, not all of these will apply. It’s worth having a chat with a Mortgage Choice broker to explore the costs involved with your individual situation, and balance these with any potential cost savings of switching home loans.

Understand the costs to refinance

Exit fees may apply when you pay out a loan early, usually in the first three to five years of your term. It could be a percentage of the remaining loan balance or it may be a set charge. Check your loan contract for more details.

Although exit fees have been banned on new loans taken out after 1 July 2011, they could still apply to loans taken out before this date.

Worth knowing: Exit fees don't include break costs, which can be imposed if you bail out of a fixed rate loan before the fixed term expires. It’s worth speaking to your Mortgage Choice broker if you are thinking about refinancing a fixed rate mortgage.

When you refinance, your new lender may charge a range of upfront fees. However not all lenders charge these fees and some may be negotiable.

They may include:

  • Loan application fee - charged when you apply for a new home loan
  • Valuation fee - your lender may charge a fee to have your property valued by a professional property valuer
  • Settlement fee - your lender may charge a fee to pay out your current mortgage

LMI is a type of insurance designed to protect the lender, not the home owner, if you cannot keep up the loan repayments. It applies if you borrow 80% or more of your home's value and isn't transferable between lenders. This means that even if you paid LMI when you first purchased your home, chances are you'll be asked to pay LMI again when you refinance.

You may be able to capitalise LMI (add it to the loan) though you need to be careful that this won't push your level of borrowings over the lender's preferred 'loan to valuation ratio' (LVR) - the amount you borrow as a percentage of your home's value.

Some states charge a tax on your mortgage which is known as stamp duty, which is calculated on the amount of the loan. If you increase the size of your loan when refinancing, stamp duty may be payable.

You may also need to pay a Mortgage Registration Fee which is imposed by the Land Titles Office (or equivalent) for registering your mortgage onto the title record for the property.

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Refinancing guide

Considering refinancing? Our guide explains the reasons, costs and steps involved in refinancing your home loan.


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Additional resources

Get answers to all your refinancing questions in 60 seconds with our Mortgage Minutes!!

When is the right time to refinance your home loan? With Joel Gibson

Is refinancing worth the fuss? With Joel Gibson

When should I refinance?

Is refinancing worth the effort?

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