How to Refinance a Home Loan

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Is it a good idea to refinance a home loan?

How does home loan refinancing typically work?

Looking to refinance your home loan?

Long story short

Refinancing could save you thousands on interest

Swapping to a lower interest rate might slash your repayments and save you big bucks over time.

Access features to pay off your loan faster

Switching loans can unlock handy options like offset accounts and redraws to speed up repayments.

Consolidate your debts to simplify your repayments

Roll personal loans or credit card debts into your mortgage for one manageable repayment.

Tailor your loan to suit your lifestyle

Whether it’s fixed, variable, or a mix, refinancing lets you choose the rate that fits your needs.

Is it a good idea to refinance a home loan?

Refinancing means switching from your current home loan to a new one.  

Many homeowners refinance to get lower interest rates, reduce monthly repayments, or pay off their loan faster. Others do it to access helpful features like redraw options and offset accounts. Some switch between fixed-rate and variable-rate home loans, or consolidate other debts into their home loan. 

There are pros and cons to refinancing. It can be easy to be tempted by a low interest rate, but it’s a good idea to consider the refinancing costs you might be taking on by switching, like exit fees.  

It’s worth spending some time working out why you want to refinance and the goals you hope to achieve.  

How does home loan refinancing typically work?

1. Assess your current home loan

Before you decide to switch, it’s worth going back to the drawing board to understand your current circumstances. What do you like (and dislike) about your current home loan? Here are some things to chew on: 

Equity in current loan

First question – do you have enough equity (that’s how much of your home you own, not the bank)? If you want to dodge lenders mortgage insurance (LMI), you must have at least 20% equity.¹For more information, see Moneysmart – Lenders mortgage insurance (LMI) If you’re under the threshold, refinancing can get expensive fast, as LMI can add up to thousands – if not tens of thousands – of dollars on top of your loan amount. If you have decent equity, perhaps you’d prefer to put it straight into your new loan and reduce the loan amount, or you could keep it in a redraw facility so you can cut down your interest payments and still access it easily if needed.

Accessibility

Do you like the way you access your current loan? Is there a great online experience, or do you prefer dealing with someone face-to-face?

Variable or fixed rate

Do you want to switch between the two, or are you happy with the type of rate you’re currently on? It’s important to be aware of any break fees involved if you decide to opt out of your fixed-rate home loan.

Consolidating debt

Got a bunch of credit card debts, a personal loan balance, or a car loan all racking up interest? Refinancing can roll these into your mortgage. But it’s worth thinking about the pros and cons of debt consolidation. It might be easier to manage having all your repayments in one account (your refinanced home loan), but it might extend your loan, meaning you’ll be paying interest for longer.

Payback and affordability

Can you genuinely afford the new repayments (even if rates go up)? It’s a good idea to run the numbers first. You might want to get the help of a refinancing calculator to stress test your budget. 

2. Compare home loan options  

Not all home loans are the same, and a lower interest rate isn’t the whole story. When comparing home loan options, here are some things to look out for: 

Loan types

Fixed-rate home loans give you budget certainty for a few years, while variable-interest ones can go up or down. Some loans also tease you with a sweet intro rate (you’ll see this as ‘honeymoon rates’), typically lasting for 12 months, then switch to something steeper as they revert to the standard variable rate.

Interest rates

These depend on the loan type – like variable-rate loans having different rates from fixed-rate ones – and can also vary between lenders.

Comparison rate

The interest rate tells you what you’ll pay each year, but the comparison rate rolls in fees and charges, giving a better apples-to-apples picture.

Loan features

Offset accounts, redraw facilities, flexible repayments – it makes sense to work out what you’ll really use.

Fees

Application, exit, break, settlement – they can all chip away at your savings.

It’s only smart to look around and compare your options. Don’t just hunt around yourself – you can use an online platform to start a comparison and see what’s actually out there, side by side. iSelect has partnered with Aussie Home Loans, an online broker with the experience and knowledge to help you find a home loan suitable for you.  

3. Calculate the costs of refinancing  

Refinancing isn’t free, and, as mentioned earlier, it’s important to research any fees you may need to pay to exit your current loan. Your new loan might also have some up-front costs, like the following: 

• application or establishment fees for setting up a new loan
• property valuation fees
• lender legal fees
• lender’s mortgage insurance. 

Ignoring (or worse, overlooking) these costs is why some homeowners regret making the swap. It’s a good idea to work out how long it’ll take for your interest savings to pay you back for all those up-front costs. Knowing when you’ll break even will help you decide whether refinancing is worth it. 

Again, you can use our refinancing calculator to help you crunch the numbers. Also, Aussie Home Loans can help you work out what costs you’ll be up for when you refinance. That’s important, because sometimes the costs can outweigh the benefits. 

Whether you’re refinancing with the same lender or moving to a new one, fees will vary. If you’re staying with the same lender, you can try asking if they can waive some of the fees. Remember, you can leverage your loyalty! 

Helpful tip

Refinancing isn’t a one-size-fits-all fix. What works for your neighbour, mate, or cousin (who ‘swears by their broker’) might not stack up for you or your finances. If you’re unsure, it’s a good idea to see what your options look like. You can compare a range of deals and providers quickly with iSelect’s comparison tool. Our team has partnered with Aussie Home Loans, so you’re not left sifting through the haystack yourself. 

Sam Hyman

General Manager – National Sales, Aussie

4. Apply for your new home loan  

Once you’ve decided on your new loan, it’s time to apply for it. 

You can often do this online or in a branch. If you have a broker like Aussie Home Loans, they will submit the application on your behalf. 

If you’re refinancing with a new lender, you’ll have to provide personal and financial information just like you did when you applied for your original loan. 

The lender may require: 

• proof of identity
• employment details (over a number of years)
• wage slips (proof of your recent income)
• details of your assets, existing debts and ongoing expenses
• your latest notice of assessment from the Australian Taxation Office, or if you’re self-employed, your tax returns and PAYG
• bank statements. 

That may sound like a mountain of paperwork. But it’s fair enough, as your new lender needs to look into your eligibility. Most lenders ask for this information because they won’t just hand out low rates for nothing. To size up your borrowing power, they want to make sure where you stand with the following:  

• your current home loan
• employment and income 
• expenses 
• assets and liabilities
• other debt
• your loan preferences (e.g. features you want to add, extra repayments, etc). 

5. Get conditional approval 

Once your loan application has been sent off, your lender will usually take a few days to check everything out. So don’t stress if it’s taking some time.  

A quick heads-up: It’s pretty standard for your lender to ask for some extra paperwork.  

Oh, and you’ll need to sign a discharge form to give your old lender the heads-up. This is also the time when you’ll have to settle any fees that apply to your old loan, such as break or discharge fees. 

6. Complete a house valuation  

Before your new home loan is fully approved, your new lender will typically request a property valuation so they can see how much your property is worth.  

7. Time to celebrate – your refinanced loan’s approved  

Get the green light? Nice work. Once your application is formally approved, your new lender will likely send you a mortgage contract pack containing relevant paperwork, such as:

Mortgage contracts

This is the actual contract detailing the loan amount and terms of the loan, repayment type, features, fees, and the like.

Direct debit form

You can choose which account your mortgage payments will be drawn from once the loan settles.

You may also receive less formal documents, like a ‘welcome pack’ confirming all your loan and repayment details. 

At this time, a broker can help you make sure you fully understand all the paperwork and documentation that you need to submit. Once you’ve signed the contract, and eventually your old loan is paid off by your new loan, that’s settlement! 

Time to pop the champagne (or treat yourself to some celebratory doughnuts)! 

Looking to refinance your home loan?  

Remember, one size doesn’t fit all. Make sure you consult a mortgage broker and explore various home loan options so you can find the one that works for your circumstances. 

Our team at iSelect have partnered with Aussie Home Loans to help you compare a range of different providers. Use the iSelect comparison tool to get started.