Refinancing your home loan can feel like a big decision. Maybe you’ve heard friends talk about scoring a better interest rate, or you’re curious whether switching lenders could save you money each month. Whatever brought you here, you’re not alone. In 2023, over 452,000 Australians refinanced their home loans in search of a better deal amid rising interest rates.
But what does refinancing involve? Is it right for your situation? And how do you get started without getting overwhelmed by paperwork and jargon?
This guide breaks down everything you need to know about refinancing your home loan, from understanding the basics to weighing up the costs and benefits. By the end, you’ll have the knowledge to decide if refinancing makes sense for you and how to navigate the process with confidence.
What is refinancing?
Refinancing is when you take a loan to a different product or lender. It swaps your existing mortgage for a newer one — preferably on more attractive terms that meet your financial goals. Refinancing comes in two major types:
Internal refinance is when you stay with your current lender, but use a different bank loan product. For instance, you could convert from a variable rate to a fixed rate, or upgrade to a loan with features like an offset account.
External refinancing means placing your mortgage with a different lender entirely. This usually takes place so that you can get a lower interest rate or access better loan features that your current lender doesn’t offer.
People refinance for all kinds of reasons: to reduce monthly repayments, consolidate debts, access home equity for renovations, and simply to take a loan to fit within their lifestyle right now.
Is refinancing right for you?
Refinancing isn’t a one-size-fits-all solution. It works well for some borrowers, but not everyone will benefit.
You might want to consider refinancing if:
- You can secure a significantly lower interest rate
- Your current loan lacks features you need, like a redraw facility or offset account
- You want to consolidate debts into one manageable repayment
- You’re looking to access equity in your home for a renovation or investment
- Your financial situation has improved, and you qualify for better loan terms
On the flip side, refinancing might not be worth it if:
- You’re locked into a fixed-rate loan with high exit fees
- The costs of refinancing outweigh the savings you’d gain
- You’re planning to sell your property in the near future
- Your financial situation hasn’t improved since you took out your current loan
A good rule of thumb? If you can recoup the costs of refinancing within 12 months, it’s worth exploring further.
How many Australians are refinancing?
Refinancing has become increasingly popular among Australian homeowners. In 2023, PEXA reported that 452,025 home loans were refinanced nationally, totaling $220.4 billion in value.
Victoria led the country with 148,368 refinances, followed closely by New South Wales with 134,934. Meanwhile, Western Australia showed the strongest growth, with refinancing activity up 20.7% from the previous year.
Interestingly, while refinancing surged throughout most of 2023, there was a noticeable decline in the final quarter. This suggests that many borrowers acted early in the year to lock in better rates before market conditions shifted.
If you’ve been thinking about refinancing, you’re in good company and the numbers show that many Aussies are finding value in making the switch.
What are the costs associated with refinancing?
Refinancing isn’t free, especially if you’re moving to a new lender. Understanding the potential costs upfront helps you decide whether the savings are worth it.
Common refinancing costs include:
- Loan discharge fee: Charged by your current lender to close your existing loan
- Application or establishment fee: Required by your new lender to set up the loan
- Settlement and handling fees: Covers the administrative work involved in transferring your mortgage
- Break costs: If you’re exiting a fixed-rate loan early, you may face significant penalties
- Lenders Mortgage Insurance (LMI): May apply if your new loan has a higher loan-to-value ratio
- Mortgage registration fees: Charged to register the new mortgage with your state government
- Ongoing account fees: Your new loan may come with monthly or annual fees
These costs can add up quickly, which is why it’s important to calculate whether your potential savings justify the expense. Many borrowers aim to recover refinancing costs within 12 months through lower interest rates or better loan features.
How do you start the refinancing process?
Starting the refinancing journey can feel daunting, but breaking it down into steps makes it more manageable.
Step 1: Know your goals
Why do you want to refinance? Are you aiming for lower repayments, better loan features, or access to equity? Getting clear on your goals helps you choose the right loan.
Step 2: Work out potential savings
Compare your current loan with options available in the market. Calculate how much you could save by switching, and factor in any refinancing costs.
Step 3: Get your financials together
Review your current mortgage and ensure you have a good repayment history. Gather statements for any debts you’d like to consolidate, and assess your overall financial health.
Step 4: Select the right home loan
Look for a loan with competitive interest rates, features that suit your needs, reasonable fees, and strong customer support. Don’t just focus on the rate—consider the overall package.
Step 5: Gather your documents
You’ll typically need:
- ID and proof of income (recent payslips)
- Six months of bank statements
- Current home loan statements
- Records of any other debts (credit cards, personal loans)
- Council rates notice
- Details of any assets you own
Step 6: Apply and settle
Submit your application to your chosen lender. Once approved, arrange settlement to transfer your loan. The entire process usually takes one to two weeks, though some lenders offer faster options.
What are the benefits of refinancing?
Refinancing can deliver several advantages, depending on your financial goals.
Lower repayments: Securing a lower interest rate can significantly reduce your monthly mortgage payments, freeing up cash for other priorities.
Pay off your loan faster: If you keep your repayments the same while switching to a lower rate, more of your payment goes toward the principal, helping you pay off your home sooner.
Access better loan features: Upgrade to a loan with an offset account, redraw facility, or other features that weren’t available when you first borrowed.
Consolidate debts: Roll your credit card balances or personal loans into your home loan at a lower interest rate, simplifying your finances.
Tap into your equity: Use the equity you’ve built in your home to fund renovations, investments, or other major expenses—often at a much lower rate than other forms of borrowing.
Adjust your loan term: Lengthen your loan period to reduce repayments, or shorten it to pay off your mortgage sooner and save on interest.
What are some potential drawbacks of refinancing?
While refinancing offers many benefits, it’s not without risks and downsides.
Cost of refinancing: As mentioned earlier, fees can add up quickly. If you don’t save enough to offset these costs, refinancing might not be worthwhile.
Debt consolidation risk: Rolling other debts into your mortgage can lower your repayments, but it also means you’re paying off those debts over a longer period—potentially costing more in interest over time.
Equity access risk: Accessing your home equity can be tempting, but borrowing against your property increases your debt and reduces your ownership stake. If property values drop, you could end up owing more than your home is worth.
Fixed-rate exit penalties: Breaking a fixed-rate loan early can result in hefty fees that wipe out any savings from refinancing.
Potential for re-borrowing: If you’re refinancing to consolidate debts, there’s a risk of falling back into old spending habits and accumulating new debt.
Tips for a trouble-free refinancing experience
Refinancing doesn’t have to be stressful. Follow these tips to keep the process smooth.
Assess your situation honestly: Be realistic about your financial position and what you hope to achieve through refinancing.
Negotiate with your current lender first: Before shopping around, talk to your existing lender. They may offer you a better rate or features to keep your business.
Be wary of overly eager brokers: While brokers can be helpful, make sure they’re acting in your best interest and not just chasing a commission.
Maintain financial discipline: If you’re consolidating debts, stick to a budget to avoid falling back into the same patterns.
Keep your mortgage under review: Interest rates and loan products change regularly. Make it a habit to review your mortgage every year or two to ensure you’re still getting a good deal.
Use tools to compare options: Online calculators and comparison tools can help you see how different loans stack up against your current mortgage.
