How Does Refinancing Work?

An existing home loan may no longer suit your current financial needs. Borrowers may review their loan when rates, property values, income or financial goals change. Understanding the home loan refinancing process can help you decide whether switching loans is worth considering.

Refinancing involves reviewing your current loan, comparing suitable options and completing a new lending assessment. Costs, loan features, LVR and the remaining loan term can all affect the decision. This guide explains how does refinancing work, including the process, costs, timing and factors to consider.

This guide covers:

  • What Is Home Loan Refinancing?
  • Why Do People Refinance a Home Loan?
  • How to Refinance a Home Loan: Step-by-Step Process
  • How Long Does It Take to Refinance a Mortgage?
  • What Happens to Your Equity When You Refinance?
  • How to Know If Refinancing Is Right for You?

What Is Home Loan Refinancing?

Home loan refinancing is the process of replacing your existing mortgage with a new loan. The new loan may be arranged with your current lender or another lender. Once the new loan settles, it is generally used to pay out the existing mortgage.

The new loan can have different interest rates, fees, features or repayment terms. Borrowers may also consider changing their loan structure to suit their circumstances better. Refinancing does not guarantee a lower cost, so the complete loan arrangement should be assessed before switching.

Why Do People Refinance a Home Loan?

There are several reasons borrowers consider mortgage loan refinancing. The right option depends on the borrower’s financial position, loan objectives and current circumstances. A lower rate alone does not automatically make refinancing worthwhile.

Here are common reasons borrowers refinance:

To look for a more competitive interest rate

Borrowers may refinance after finding another loan with a more competitive interest rate. However, the rate should be considered alongside fees, features and the remaining loan term. A lower advertised rate does not necessarily mean a lower overall cost.

To change loan features

Some borrowers refinance because their current loan no longer provides the features they need. These may include an offset account, redraw facility or different repayment flexibility. Fixed, variable and split loan structures may also suit different borrowing needs.

To access home equity

Homeowners may consider refinancing to access available equity for an approved purpose. This could include funding renovations or purchasing an investment property. The amount available depends on the lender’s assessment, property value and borrowing capacity.

To consolidate debts

Some borrowers consider refinancing a home loan to consolidate eligible debts. Combining debts may simplify repayments, but it can also increase the secured debt against the property. The interest rate, fees, loan term and total repayment cost should be assessed carefully.

When a fixed-rate period is ending

Borrowers may review their options when a fixed-rate period is approaching its end. This can be an opportunity to compare the existing loan with other available options. Any applicable break costs should also be considered before switching early.

How to Refinance a Home Loan: Step-by-Step Process

The home loan refinancing process usually starts with reviewing the existing loan. It then involves comparing options, preparing documents and completing a new lending assessment. The process finishes when the new loan settles and pays out the existing mortgage.

  • Step 1: Review your current home loan
    Start by checking your current interest rate, outstanding balance and remaining loan term. Also review the loan structure, features, fees and any applicable early exit or break costs. This provides a clear starting point for comparing mortgage loan refinancing options.

  • Step 2: Check your financial position
    Refinancing a home loan involves a new lending assessment, so previous loan approval does not guarantee approval for a new loan. Lenders may consider your income, employment, living expenses, existing debts, credit history, assets and current loan balance. Your financial position should also be considered against your current borrowing objectives.

  • Step 3: Estimate your home’s current value and LVR
    Your property’s current value can affect the options available when you refinance a home loan. Loan-to-value ratio, or LVR, compares the loan amount with the property’s value.

    LVR = Loan amount ÷ Property value × 100

    For example, a $600,000 loan against a property valued at $800,000 gives an LVR of 75%. A higher LVR may affect loan eligibility, pricing or potential costs, depending on the lender’s criteria.

  • Step 4: Compare new home loan options

    Compare more than the advertised interest rate when reviewing house loan refinancing options. Consider the comparison rate, loan term, repayments, fees, features and overall cost over the relevant period. Cashback offers or fee waivers should also be assessed against the loan’s ongoing costs.

    Important comparison factors include:

    • Interest rate
    • Comparison rate
    • Loan term
    • Repayment amount
    • Establishment or application fees
    • Ongoing fees
    • Offset facility
    • Redraw facility
    • Fixed, variable or split structure
    • Cashback or fee-waiver offers
    • Overall loan cost

    A mortgage broker can help borrowers compare available loan options against their circumstances and objectives.

    If you are comparing a mortgage broker with dealing directly with a bank, understanding the key differences can help you decide which approach suits your needs. Read more about mortgage broker vs bank before choosing how to proceed.

  • Step 5: Calculate the cost of switching
    Refinancing should be assessed by comparing potential benefits with the costs of switching. Common costs can include discharge fees, application fees, valuation fees and relevant government charges. Fixed-rate borrowers may also need to consider break costs, while LMI may apply in some circumstances.

    A simple way to assess the potential benefit is:

    Potential benefit = Estimated savings − Refinancing costs

  • Step 6: Prepare your documents
    Once you have identified a suitable option, prepare the documents required for the application. These may include identification, payslips, bank statements, current mortgage details, asset information and liability details. Self-employed borrowers may need to provide additional financial information depending on the lender.
  • Step 7: Submit the refinance application
    The application is submitted to the selected lender for assessment. The lender may verify income, expenses, assets and liabilities before assessing serviceability. A property valuation and additional documents may also be requested where required.
  • Step 8: Receive approval and sign the new loan documents
    If the application meets the lender’s requirements, approval and loan documentation will follow. Review the loan amount, interest rate, term, repayments, fees and features before signing. The final loan terms should be understood before proceeding with settlement.
  • Step 9: Discharge the old mortgage and complete settlement
    The existing lender must complete the discharge process for the current mortgage. The new lender then coordinates the settlement process and pays out the existing home loan. Once settlement is completed, the new loan becomes active and repayments begin under the new agreement.

How Long Does It Take to Refinance a Mortgage?

The time required for mortgage loan refinancing in Australia can vary between applications and lenders. A straightforward application may progress within a few weeks, while complex applications or processing delays can take longer. Having complete documents ready can help reduce avoidable delays during the refinancing process.

What Happens to Your Equity When You Refinance?

Your home equity generally remains linked to your property’s value and the amount owed on your mortgage. If you refinance the same outstanding balance, the refinance itself does not automatically reduce your equity. However, increasing the loan to access equity increases your debt and may affect your repayments and LVR.

For example:

  • Property value: $800,000
  • Existing loan balance: $500,000
  • Illustrative equity: $300,000
  • New loan after refinancing: $500,000
  • Equity remains approximately $300,000, assuming the property value is unchanged.

How to Know If Refinancing Is Right for You

Refinancing may be worth considering when your current loan no longer suits your financial circumstances or goals. However, the decision should consider the total cost of switching rather than the interest rate alone. Comparing your existing loan with the proposed new loan can help you determine whether home loan refinancing offers enough value.

Before deciding, compare these factors:

  • Current interest rate: Check the rate currently charged on your existing loan.
  • Proposed interest rate: Compare the new rate with your current rate.
  • Current loan balance: Consider how much you still owe on your mortgage.
  • Remaining loan term: Check how many years remain on your existing loan.
  • New loan term: Confirm whether the new loan changes your repayment period.
  • Current and new fees: Include ongoing fees and applicable loan charges.
  • Refinancing costs: Consider discharge, application, valuation and other relevant switching costs.
  • Available features: Compare features such as offset accounts and redraw facilities.
  • Estimated repayment difference: Check how the new loan could affect regular repayments.
  • Long-term interest implications: Consider how the new rate, balance and loan term affect total interest.

Signs Refinancing May Be Worth Considering

  • Your current rate is no longer competitive: Comparing available options may identify loans with different rates or features.
  • Your fixed-rate period is ending: Reviewing your options before the fixed period ends may help you understand what comes next.
  • Your financial goals have changed: You may need a different loan structure or want to explore available equity.
  • You want different loan features: An offset account or redraw facility may be relevant to your circumstances.
  • You are considering debt consolidation: Combining eligible debts requires careful comparison of the total costs and extended loan term.

Costs and Risks to Check

  • Exit and discharge fees: Your existing lender may charge fees when closing or transferring the current mortgage.
  • Application and valuation costs: A new lender may charge application-related fees or require a property valuation.
  • LMI considerations: A higher LVR can affect the costs and options available to you, depending on the lender.
  • Loan term changes: Extending the loan term can reduce scheduled repayments but may increase total interest over time.

When Can a Mortgage Broker Help With Refinancing?

A mortgage broker can help borrowers compare refinance home loans and understand the options available for their circumstances. They can also help organise documents, communicate with lenders and explain different loan structures.The right support can simplify refinancing, especially for complex financial circumstances.
A mortgage broker can potentially help you:

  • Compare loan options: Review options across an extensive network of accredited lenders.
  • Understand loan features: Compare structures, rates, repayment options and relevant features.
  • Assess switching costs: Identify costs that may need to be considered before changing loans.
  • Organise documentation: Help identify the documents required for the application.
  • Navigate lender communication: Assist with communication throughout the application process.
  • Discuss complex circumstances: Explore options where income, employment or financial circumstances require additional consideration.
  • Review broader goals: Consider how refinancing may fit your wider borrowing or property plans.

A broker may also provide support throughout the application and lending process. Learn more about the benefits of using a mortgage broker in Sydney and how this support can assist borrowers.

Ready to Review Your Home Loan Options?

Refinancing can involve several factors, including rates, loan features, costs and your current financial position. Local Finance Guru can help you explore refinance home loan in Sydney options based on your circumstances. Our experienced mortgage brokers can also help you understand the application process and available lending choices.
We have access to thousands of loan products from hundreds of lenders. Our team provides tailored finance solutions and local expertise throughout the application process. Contact us on 0430 411 466 or email vipul@localfinanceguru.com.au to arrange a free consultation and discuss your finance options.

FAQs

Yes. Your lender may offer another loan option, but comparing other lenders can help you assess alternatives.

There is generally no set frequency that suits every borrower. Consider switching costs, loan terms and your financial circumstances before refinancing again.

A lender may require a property valuation to assess the home’s current value and calculate the LVR. The valuation process can vary between lenders.

A higher property value may improve your equity position and affect your LVR. Your refinancing options will still depend on lender criteria and your financial circumstances.

Applying for refinancing can involve a credit enquiry, which may appear on your credit report. Multiple credit applications within a short period may also affect how lenders assess your application.