How to refinance a home loan, step by step

The refinancing process at a glance

Refinancing replaces your existing loan with a new one, either at your current lender or a new lender. The mechanics are similar to your first loan, but usually faster, because you already own the property and have a repayment track record. Most of the work sits in five stages.

1. Set your goal. Decide what you want the new loan to do, whether that is a lower rate, an offset account, a fixed portion for certainty, or releasing equity. The goal shapes which lenders and products fit.
2. Compare and get numbers in writing. Line up the rate, the comparison rate, ongoing fees and features side by side. A broker can pull several lenders at once, or you can approach lenders directly.
3. Apply and get the property valued. The new lender assesses your income, expenses and debts, then values the property, which sets your loan to value ratio.
4. Receive approval and loan documents. Read the offer carefully, then sign. This is the point to confirm the rate, the term and any fees match what you were quoted.
5. Settlement. The new lender pays out your old loan and takes over the mortgage. Your old account closes and repayments begin on the new one.

Documents lenders usually ask for

Having your paperwork ready is the single biggest thing you can do to keep a refinance moving. Exact requirements vary by lender, but most ask for a version of the following.

A realistic timeline

A straightforward refinance often settles within two to four weeks once a complete application is lodged, though complex situations or slow document gathering can stretch it out. The valuation, your responsiveness with paperwork and the discharge from your old lender are the usual bottlenecks. The discharge step, where your current lender releases the mortgage, is frequently the slowest part, so lodge that discharge request early rather than waiting until the end.

Costs to budget for

Even a refinance to a lower rate carries switching costs, and the point of the exercise is that the ongoing saving clears them within a sensible time. Common costs include:

• Discharge or exit fee from your current lender to release the loan.
• New loan and application fees, though some lenders waive these to win your business.
• Valuation fee, if the new lender charges for it.
• Government fees to discharge and register the mortgage, set by your state.
• Break costs, which can be significant if you are leaving a fixed rate early.
• A fresh round of lenders mortgage insurance, if your loan to value ratio is above 80 percent, since it does not transfer between lenders.

To turn these into a decision, work out your break even point, the number of months of savings needed to recover the total switch cost. The comparison rate helps you weigh rate against fees, and the worth it guide shows how to run the full comparison.

Common refinancing mistakes

• Chasing the headline rate and ignoring fees, features and the comparison rate.
• Resetting to a fresh 30 year term without noticing it can raise total interest even at a lower rate. Ask to keep your remaining term where you can.
• Rolling other debts into the mortgage to lower repayments, which can multiply the interest paid over decades.
• Forgetting break costs on a fixed loan, which can wipe out the saving.
• Applying to several lenders at once, which stacks credit enquiries. Do the homework first, then apply once.

Frequently asked questions

Keep reading

Decide first with when refinancing is worth it, understand pricing with the comparison rate guide, put spare cash to work using ways to pay off your mortgage faster, or find someone to manage the switch with how to choose a mortgage broker.

Sources: Australian Securities and Investments Commission (ASIC) MoneySmart, guidance on switching home loans and comparison rates; Mortgage and Finance Association of Australia (MFAA).