How does refinancing work?
Home loans are one of the biggest expenses most Australians will ever have to pay and, in recent years, that cost has quickly grown.
As interest rates rose between May 2022 and 2024, Mozo found the average Australian borrower now has to find an extra $1,338 per month to meet their mortgage repayments.
However, you may be able to ease some of the financial strain of your home loan by refinancing.
What is refinancing?
When buying a property, most Australians will need a home loan to finance their purchase. This home loan comes with its own interest rate, features, and terms. But what if another bank or lender offers a lower interest rate, more useful features, or better terms?
The process of moving your existing home loan balance over to a new lender is known as refinancing.
When you refinance your mortgage, you’re transferring the amount of money you still owe to another lender, allowing you to choose a completely different home loan from the one you have.
Why refinance a home loan?
There are plenty of reasons why borrowers may refinance their home loan, but one of the most common is to get a lower interest rate.
According to the 2024 Mozo Home Loan Report, those who compare home loans regularly were found to have lower interest rates on average than those who have never compared. But that’s only one example of why people refinance.
The benefits of refinancing can include:
- Lowering your mortgage repayments
- Avoiding rising interest rates
- Accessing new features, like offset accounts
- Gaining more favourable loan conditions
- Taking advantage of special offers, like cashback deals
- Consolidating debts
- Accessing equity for renovations or investments.
You can think of refinancing a home loan like changing gyms.
Say you signed up for Gym A a few years ago, but they’ve recently raised their membership fees. It’s now pricier than it was when you signed up, but you can still get your workout done there.
Gym B, on the other hand, is a bit cheaper and offers a free personal training session for new members. It also has more gym equipment on offer, meaning you can get your workout done more efficiently.
If you decide to switch gyms, you may be able to save money and pay for a service that fits your needs more closely. The same sort of principles can apply to a home loan.
Understanding how refinancing works
Refinancing works by paying off your existing home loan with a new one. In this sense, you’re essentially replacing it. However, it’s not quite that simple.
As you’re asking a new lender to take on your debt, they’ll still have checks and balances in place to assess your application.
They’ll likely perform a new property valuation, ask for statements from your current home loan, and enquire about how much you have left to pay.
On your end, you’ll need to organise a mortgage discharge with your existing lender, which might mean you need to pay a discharge fee.
Once everything is finalised, a settlement date and mortgage title transfer will be arranged by the lenders.
How to refinance your home loan
To refinance a home loan in Australia, you’ll need to understand the eligibility criteria of your new home loan, collect the necessary documentation, and follow five key steps.
1. Assess your refinancing needs
First, you need to understand your reasons for refinancing.
Are you struggling to make mortgage repayments? Do you want to pay off your home loan faster? Asking yourself these questions will help you understand what you don’t like about your current home loan and can help you decide what features you want with your new one.
For example, if you’re struggling to make repayments, or you just want to reduce the amount of interest you pay, then you might look for a lower interest rate or a home loan with an offset account.
2. Compare home loans
Once you’ve found out what to look for, it’s time to compare refinance home loans.
You can type in your outstanding loan amount and how long you have left to pay and see an updated list of home loans, fit with estimated initial monthly repayments, interest rates, and a brief overview of each product, then you can find more details by clicking the details tab.
At this point, it might be useful to use a refinance calculator to get an idea of how much you could save.
3. Consider the cost of refinancing
While the main motivation for you to refinance might be to save money, it’s also important to consider the costs associated with refinancing.
Refinancing costs can come from your current lender and your new lender.
Current lender fees
- Discharge fees
- Break fees (if you’re currently on a fixed-rate home loan)
- Exit fees (which may only be applicable for those who took out a loan before 1 July 2011).
New lender fees
- Application fees
- Property valuation fees
- Settlement fees
- Mortgage registration fees.
Aside from the cost of refinancing, you’ll also need to put in a fair amount of time and effort. So, keep all of that in mind when you’re assessing your need to refinance. Read the full guide on refinancing costs.
5. Apply for a new home loan
After you find a home loan that you’re happy with, it’s time to apply for it. These days, a lot of lenders let you apply for a mortgage online. However, face-to-face options still exist (e.g. bank branches), and you can use a mortgage broker if you want to.
No matter how you choose to apply to refinance your home loan, you’re going to need supporting documents, such as statements from your current lender proving you’ve been paying off your mortgage diligently.
The new lender you wish to refinance with will then assess your application and you’ll hear back from them with a result.
5. Settlement
If all goes well with your application to refinance, the next (and final) step is the settlement.
This is basically when your new home loan is used to pay off your existing one and your new home loan is registered.
Congrats! You’ve just refinanced your home loan. But how much might you save?
Estimating your potential savings
Refinancing can be a powerful way to save money on your home loan, but it helps to illustrate the potential savings when you compare.
Looking at the difference between the average Big Four variable rate and the average variable rate in the Mozo database, we can see how a lower rate can really bust your mortgage bill in the long term.
The table below shows the difference your interest rate can make on a $400,000 loan over 25 years.
| Interest rate | Monthly repayments | Total interest payable | |
| Average Big Four variable rate | 7.41% p.a. | $2,933 | $479,776 |
| Average variable rate in Mozo’s database | 6.80% p.a. | $2,776 | $432,887 |
| Based on the average variable rate in the Mozo database for owner-occupiers, paying principal & interest on a $400,000 loan with <80% LVR. Correct at 13 May 2024. | |||
In the example above, a 0.61% difference in your interest rate could save you $157 per month, or $46,889 over the life of your loan.
You can estimate how much you’ll save by switching to a lower interest rate using a mortgage repayment calculator.
Determining the right time to refinance
There’s no magic formula for choosing when you should refinance. However, it’s generally a good idea to compare home loans every couple of years to ensure you’re still getting a decent rate.
If you have never checked your rate against competitors’ rates, then it’s definitely worth exploring your refinance options.
Mozo’s Home Loan Report 2024 found those who compared their rate every 6 months had a rate 0.38% lower on average than the 1 in 5 Aussies who have never compared since getting their home loan. On a $500,000 loan, that equates to monthly savings of about $118.
So, if you’re feeling like it’s time to save money, compare refinance loans and see if you can switch and save.
After more info about refinancing? Check out our refinancing guides.
