How Home Loan Refinancing Works in Australia

Most people who ask me about refinancing want one of 2 things: a lower rate, or money out of the house for something specific. The first step is the same either way. Ring your bank and ask what it will do on the rate you have now. If the bank won't move, that's when the numbers below start to matter.

Refinancing replaces your mortgage with a new loan. It pays out the existing balance, then you make repayments under the new terms. You keep your home; the rate, lender and features can change.

If you're already a Hunter Galloway client, we review your loan every 12 months. Sometimes a rate adjustment with the current bank is enough. A full refinance needs to earn its cost.

You can replace the balance you owe, ask for extra borrowing against your equity, or change the features and term. Tell me which problem you're trying to solve so we compare the right loans.

A fixed rate gives you a set rate for an agreed period. A variable loan usually gives you more room for extra repayments and an offset, though its rate can rise or fall. You can split the balance between both. We'll check the cost and rules for the features you'd use.

If an offset account is the reason for changing, check its fee and how much you'd usually keep in it. If you're moving other debts into the mortgage, read our debt consolidation guide and plan how quickly you'll repay that portion.

Start with your latest home loan statement, recent payslips and details of savings, living costs and other debts. We also need identification. Rental or business income can require extra evidence.

For a self-employed application, I'll check the lender's income requirements before you gather a pile of documents. Some refinance options use different evidence, but they still need an assessment.

The bank checks the income left after tax, living costs and other debts. Credit card limits count even when there's nothing owing. It also allows for higher mortgage repayments, generally testing at least 3% above the actual rate.

APRA allows banks to make limited exceptions, including for eligible refinances. A good repayment history may help that discussion, but it doesn't give you an automatic exemption. If your income has fallen, I'd check which options fit before lodging an application.

You can check your credit reports for errors before applying. MoneySmart lists Experian and Equifax as Australia’s 2 main credit reporting bodies, with a free report available every 3 months. See how to get your credit reports.

Allow a few weeks for the application, valuation, loan documents and payout. Missing income records or delays with the old bank can add time. If a fixed period is ending or you need renovation funds by a date, tell us at the start.

A faster-settlement service can shorten the handover after approval. The lender still has to assess you first.

The payout can include interest up to settlement and closing costs, so it can be higher than the balance on your last statement. We'll compare the payout figure with the approved loan before booking the switch.

If there's a gap, you'd need to cover it with available cash or have the lender approve a different amount or structure. If neither works, the refinance can't settle as planned. Keep making payments on the existing loan until the payout is complete.

I want the full switching cost before calling a lower rate a saving. The main items are below. A break cost or a new LMI premium can change the decision considerably.

Read more about fixed rate break costs before ending a fixed loan. A comparison rate is useful because it includes the interest rate and most fees, but it uses a standard loan example and does not include every possible cost.

Divide the upfront cost by the monthly saving. That gives you a simple break-even point.

In this example, you would be about $550 ahead after 12 months. If you plan to sell before the break-even point, switching may not recover its costs in time.

Include any cashback in the calculation, along with when it arrives and whether you might have to repay it. Then compare the rate and fees over the period you'll keep the loan.

An introductory rate needs the same treatment. Check its end date and the rate that follows.

Here's the comparison I run first. Same $500k balance, same 25 years left. First change the rate and keep the term. Then keep that new rate and extend the term. The third row is the one people miss.

At 5.5% over the remaining 25 years, the repayment falls by about $151 a month and total interest drops by about $45k before switching costs. The monthly difference uses the unrounded repayments.

Restart at 30 years and the repayment drops further. But that extra 5 years adds about $101k in interest compared with keeping 25 years at the same new rate. You even pay more interest than on the original 6% loan.

A longer term may still help if you need breathing room each month. I'd show you both costs so you can decide. Try the mortgage repayment calculator with your own balance and remaining term.

If you've got 15 years left, we can compare loans over 15 years. You can also keep the term and make extra repayments within the new lender's rules. Our extra repayment calculator shows how paying more changes the loan.

Equity is the home's value less what you owe. To spend some of it, you generally need to borrow more, and the lender checks whether you can afford that larger debt.

Say the home is worth $700k and you owe $400k. Borrowing up to 80% of the value would mean a $560k loan, leaving $160k of possible extra borrowing before fees and the lender's other checks.

You can ask for less. Here's the same home with $100k added for renovations.

We'll check the valuation, purpose of the funds and repayments on the bigger loan. The equity calculator gives a starting estimate. Our loan-to-value calculator shows the share of your home's value you would be borrowing.

If your home is worth more or the balance is lower, you may qualify for a different pricing tier. The lender needs to accept the value before relying on it. A valuation below what you expected can reduce the available loan or introduce LMI.

For a small renovation, an approved loan increase may be enough. Structural work or an extension may need a construction loan, plans and a building contract.

A construction lender generally releases money to the builder in stages. Interest on that portion is charged on the money drawn. Keep the existing mortgage repayments in the budget while the work is underway.

Send us the plans and budget, including any work you'll do yourself. We'll check the funding approach before you commit to the builder. Our construction loan guide explains the process.

I'd hold off if you expect to sell or repay the loan before recovering the costs, if a break cost uses up the saving, or if a fresh LMI premium makes the switch expensive.

If the current bank's offer comes out ahead after the comparison, staying can be the better result. You don't need to change lenders for the review to have been useful.

An offset is a separate account whose balance reduces the loan balance charged interest. Redraw is access to extra repayments already made into the loan. Their access rules can differ, so check transfer limits, fees and what happens as the loan is paid out.

I'd also check the app you'll use every week. Can you see each loan split, move money easily and manage multiple offsets if you need them? A small rate saving can feel less useful if the new setup makes your everyday banking harder.

Before settlement, agree where the old offset money goes and how available redraw affects the payout. If the property may later become an investment, get tax advice before moving money between the loan and accounts.

You can't know where rates will go next. Compare the offers available now and check again if rates change before settlement. A fixed rate gives certainty for its agreed period; whether it ends up cheaper depends on what variable rates do.