Refinance home loans

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How to refinance a home loan

Switching is easier than you think. You just need to compare, find a better home loan and then apply for it like any other mortgage. Here are the steps involved in refinancing your home loan:

🔎 Check your interest rate. Look at competitive mortgage rates and see if yours is too high.

📞 Speak to your current lender and ask for a lower rate. Ask for a lower rate; if your lender agrees, you can start saving money immediately without refinancing.

📊 Compare home loan options. If you do decide to switch lenders, look for a loan with a better rate and features you need. Make sure it's a loan type that matches your situation.

🧮 Crunch the numbers. Examine the costs of your new loan, including application and ongoing fees and make sure the new loan really is a better deal. Check your exit costs from your current loan too (there may be a discharge fee or break costs).

📝 Apply for the new home loan. Collect your mortgage documents, submit your application and then wait for approval from the new lender.

🏃‍♀️ Exit your current loan. Notify your current lender and discharge your mortgage. Your new and current lender will take care of the rest.

Refinancing is quite a straightforward process, although it requires quite a lot of paperwork to submit a loan application. If your situation is complicated or unusual, you may want expert refinancing guidance, so you could reach out to a mortgage broker.

Read our detailed, step-by-step refinance guide

How much money can you save by refinancing your home loan?

Refinancing to a lower interest rate will lower your monthly mortgage repayments. Even a small decrease in monthly repayments can add up to thousands of dollars over the length of a home loan.

Using ABS and Finder data, we estimate that the average refinancer could save up to $3,288 a year by switching to a lower rate loan. This is just an estimate, and not a true indication of any one borrower's potential savings.

Here's how we calculated that figure.

How a home loan refinance can save the average borrower $3,288 a year

According to figures from the Australian Bureau of Statistics, 38,026 Australians refinanced their home loans in June 2021. The average loan size refinanced was $457,995.

According to Finder app data the average user inputs a current interest rate of 3.30%, but there are much lower rates available on Finder.

Let's assume a borrower is 4 years into a 30-year mortgage with the details above and decides to refinance. Let's assume their original loan amount was $500,000. The loan principal has shrunk to $457,995 after 4 years. They find a new loan through Finder with a rate of just 2.14% and minimal fees.

Being 4 years into the loan, the borrower refinances to a 26-year term. This way they will repay the loan in the same amount of time (they could refinance to a 30-year term and get even lower monthly repayments, but extending the loan would mean paying interest over a longer time).

Now of course this is just an estimate and doesn't take into account your personal circumstances or factors like interest rate rises (you won't be on the same rate for 25 years) and fees. Your own savings could be less than this, or more, depending on your original loan amount, loan term, your current interest rate and the amount of your home loan that remains unpaid when you refinance.

There are more benefits to refinancing than just saving money

• Get more mortgage features. Borrowers may switch to a mortgage because it has features like additional repayments, a redraw facility, portability or offset accounts. These features can help you save on interest repayments or give you more flexibility.
• Unlock your equity. If you've repaid a substantial amount of your mortgage then this is equity. You can borrow this equity using a line of credit or by refinancing and borrowing more money.
• Consolidate debt. You can refinance multiple debts into your mortgage and pay it off with a single interest rate. This can help because a home loan rate is lower than a car or personal loan rate. However, paying off a smaller debt over decades by adding it to your mortgage can end up costing you more in interest over time.

Video: Why you should consider switching

How much does refinancing cost?

There are costs involved with refinancing your loan, including lender fees and government charges. They can include:

• Upfront fees for your new loan. Some lenders charge application or settlement fees while others don't.
• Valuation fees. Your new lender will value your property during the application. They may charge a fee of around $200-$250, although many cover this fee for you.
• Discharge fees. Lenders often charge a fee to end a home loan, whether you are refinancing or paying the loan off because the property is sold.
• Fixed rate break costs. If your current home loan has a fixed interest rate, you may have to pay an exit fee for breaking the loan. This can be thousands (or even $10,000-plus) so be sure to ask your current lender for a break fee before committing to a refinance.
• Government fees. Refinancers may have to pay two state government fees, one to discharge their old loan and one to register the new one.

Here's a quick example of switching costs in a hypothetical refinance scenario (using government fees from Victoria):

Learn more about calculating your refinancing costs

When you should not refinance

There are situation where refinancing your home loan may cost you more than the benefits you'll get from refinancing to a cheaper rate loan. Here are some common ones:

Your fixed rate break costs are too high

If the cost of breaking a fixed rate loan is too high, then refinancing may not worth it. Check with your current lender for a better idea of your break costs (it's hard to calculate on your own) and compare this fee against the savings you'll make with the new, cheaper loan.

Your equity is below 20% of the property's value

If you own less than 20% of the property, meaning your equity is less than 20% of the home's total value and your mortgage is worth more than 80% of its value, then you will have to pay lenders mortgage insurance when you refinance. This is payable even if you already paid it on the first home loan. This can be a big cost and sometimes, it can cancel out the financial benefits of refinancing to a cheaper loan.

Your property has lost value

Your equity is determined by your property's value. If you own 20% of a property that you paid $700,000 for, and that property is now only worth $650,000, it's going to be even harder to access equity and refinance. While this is a relatively rare scenario, properties can decline in value. In this situation, you may need to get professional valuation to make sure you have enough equity to refinance.

Your loan amount is small or you're selling soon

If your loan amount is relatively small, then the savings from refinancing might not be worth the hassle. If you're planning on selling within the next six months, then the effort, hassle and cost involved in refinancing could also cancel out any financial rewards.

Your home loan refinance questions answered

• Can I refinance a fixed rate loan?

  You can refinance a fixed rate home loan. But you have to pay a break fee for exiting the loan early during the fixed period. If you are close to the end of the fixed period on your loan then this fee will be smaller but if you have a few years left it could cost thousands. Your current lender can provide you with a break cost estimate to help you decide if the cost is worth it.

• How much equity do I need to refinance?

  Theoretically you can refinance your loan no matter how much or how little equity you have. But if your equity is under 20% of your remaining loan amount then refinancing, while possible, gets expensive. This is because your new lender will charge lenders mortgage insurance if your equity is below 20%.

• Do I need to refinance when getting divorced?

  When couples get divorced there are hard decisions to make around property. You may decide to sell the home or let one person keep it.

  If one person decides to buy out the other person's half, you will need to refinance the mortgage when transferring the property title. Otherwise the person selling would still be on the mortgage.

  You can also decide to keep the home loan as it is and continue to make repayments. Read Finder's guide to divorce and home loan refinance for more information.

• How often should I refinance?

  You can refinance as often as you like, but given the time involved and the cost of registering a mortgage, it doesn't make sense to switch frequently. You're better off finding a good deal that will hopefully remain a good deal for a few years. If your rate creeps up and you find better options, then it's time to ask your lender for a discount. And if that doesn't work, then you should switch.