Home Loan Refinancing: How to Compare Options, Costs and Timing
What refinancing means for homeowners
Refinancing is the process of replacing your existing home loan with another home loan that may be more suitable for you. In practice, it means taking your current mortgage balance and moving it to a new loan that comes with different terms, interest rates and fees. Refinancing can be done with your current lender (often described as internal refinancing) or with a different lender (external refinancing).
People consider refinancing for a range of reasons. You might be unhappy with your current home loan because the interest rate is no longer competitive, because the fees don’t suit you, or because you want a different type of home loan. The underlying idea is to make sure your home loan matches your financial priorities, rather than letting the loan settings dictate them.
Common reasons people refinance
Refinancing can be used as a strategy to pursue a lower interest rate, more attractive fees, or a different loan structure. It can also be considered when your circumstances change and you want a loan with different features than the one you originally chose.
Seeking a better rate: You may refinance when you find a home loan rate that works better for you than your current one.
Changing fees or features: Some borrowers move from a basic, ‘no-frills’ loan to a more feature-packed option if they can now afford it.
Consolidating debts: Refinancing can be used to roll other liabilities into your home loan. For example, credit card debt or a personal loan may carry a higher (often double-digit) interest rate, whereas home loan rates are often lower (single-digit). Consolidating can change the interest rate applying to that debt, though it also means the debt becomes part of your home loan.
Internal vs external refinancing
Internal refinancing means switching to a different home loan product with your current lender. External refinancing means moving to a different lender entirely. Before deciding the best option is elsewhere, it can be worth checking what your current lender can offer. If they can’t provide a better rate, or if you’re unhappy with their service, you may decide to compare a wider range of lenders.
Whichever path you take, refinancing can feel similar to applying for a home loan again. A lender will typically reassess your finances to ensure you can repay the new debt.
Costs to consider before you switch
Refinancing is not free, and the costs can vary depending on your lender, your current loan and the type of refinancing you’re doing. It’s important to check your current home loan terms and conditions for a breakdown of fees that may apply.
Discharge fees: Fees that may be charged when your existing lender releases the mortgage.
Application fees: Fees that may apply when you apply for a new loan.
Break fees: If you’re on a fixed interest rate, refinancing before the fixed term ends may trigger expensive break fees.
Other lender costs: Depending on the lender and loan, other costs may apply as part of switching.
Stamp duty is generally a tax associated with buying and selling property, not switching home loans. Since refinancing usually involves changing the loan rather than purchasing a property, you will generally not have to pay stamp duty when refinancing. One possible exception is when the title or ownership details change, such as a change to the borrower’s name, in which case stamp duty may apply. Mortgage registration fees can also apply.
Equity, LVR and lenders mortgage insurance (LMI)
Refinancing doesn’t usually require a traditional deposit. Instead, you typically need equity in your home—the portion you ‘own’ based on how much of the principal you have repaid. It’s generally considered a good idea to have at least 20% equity before refinancing, which corresponds to a loan-to-value ratio (LVR) below 80%. This can help you avoid paying lenders mortgage insurance (LMI).
If you have less than 20% equity, you may need to pay LMI again when refinancing with a different lender, because LMI is not transferable between lenders. Having more equity and better credit can improve the likelihood of securing a better deal and a lower rate.
How to compare home loan options effectively
If you decide to refinance, you’ll need to find a loan that fits what you’re looking for, then apply to refinance into that specific product. Comparing options can involve assessing rates, fees and features, and also checking the comparison rate. Because not all brands or products may be available, it’s useful to compare across a wide range of options where possible.
Some borrowers also choose to review their home loan annually by completing a “Home Loan Health Check” to see whether their current loan still suits their needs and whether changes could help them meet personal and financial goals.
Typical steps in the refinancing process
While the exact timeline can vary by lender, refinancing often follows a similar sequence of steps from research through to settlement.
1) Review your current loan: Confirm your interest rate, repayments and any potential break costs, and decide what changes could help you meet your goals.
2) Check fees and switching requirements: Ask your current lender what fees apply and what the process involves, including whether break fees or other lender costs may be charged.
3) Compare loans from multiple lenders: Look for options based on rates, fees and features, and remember to check the comparison rate.
4) Apply for the new loan: Once you’ve chosen a loan, submit an application. The lender will reassess your finances.
5) Receive approval and complete documents: After formal (and later unconditional) approval, you’ll receive documents such as the new loan contract to complete and sign.
6) Discharge and settlement: A discharge form is sent to your old lender. At settlement, the new lender replaces the old lender on the title deeds and pays out the old loan using the new loan funds.
Timing: when refinancing may make sense
You can usually refinance at any time, but timing can affect costs. If you’re on a fixed rate, waiting until the fixed period ends may help you avoid break fees. Variable rate borrowers may typically face fewer fees when refinancing.
Some people consider refinancing if a fixed-rate period is ending soon or if they’re concerned about potential rate changes. In those cases, acting sooner rather than later may help avoid paying more than expected if you don’t refinance in time.
The process length depends on the lender. Some refinances may be completed in as little as two to three weeks, while others can take longer—sometimes up to 60 days or more.
Credit score considerations
Refinancing involves a formal credit enquiry, which will remain on your credit history for five years. Refinancing may have minimal impact on your credit score if you haven’t applied for other credit recently, but multiple enquiries in a short period can lower your score. Credit reporting bodies do not distinguish between successful and unsuccessful applications when assessing credit scores; the number and frequency of enquiries matters.
Maintaining a healthy credit file generally comes down to making repayments as scheduled on your new home loan and on any other debts you may have.
Do you need a lawyer or conveyancer?
You generally won’t need a conveyancer or lawyer to refinance, as they typically become involved with sales contracts and property settlement rather than switching home loan contracts. However, because a home loan contract is a legal document, you may choose to have it reviewed by a legal professional. If you do, keep in mind this can add to your overall costs.
Balancing benefits against costs
Refinancing can be worthwhile when the overall benefits outweigh the costs. Even if a better rate is available, it’s important to consider discharge fees, application fees, potential break fees and any other charges, and to ensure you have sufficient equity to refinance without paying LMI where possible. The most appropriate refinancing frequency can vary widely depending on your circumstances and changes in the home loan market.