What refinancing a home loan means and when it can be worth checking

Refinancing a home loan means taking out a new loan and using it to pay out the one you have. The property stays yours and generally stays as security; the debt moves. The new loan may come from a different lender, or your existing lender may move you onto a different product or rate. Either way, the point of the exercise is not the paperwork — it is to test whether the loan you are on still fits, and whether moving would leave you better off once every cost is counted.

This article explains what refinancing involves, the situations in which a check is worth your time, and the specific items to get in writing before you commit to anything.

What refinancing actually involves

A refinance is a new home loan application, not a simple transfer. In broad terms:

• You complete a new application covering income, living expenses, existing debts and details of the property.
• The new lender assesses whether you can service the loan and will usually arrange its own valuation of the property.
• If the loan is approved, the new funds are used at settlement to pay out the old loan, which is then discharged, and any change of registration is recorded against the title.
• Your repayments then go to the new lender on new terms.

Every lender sets its own eligibility criteria and decides whether to lend, so nothing here should be read as a promise of approval. Confirm the documents, sequence and timeframes directly with the lender you approach.

One thing that catches people out is that features do not travel automatically. An offset account, a redraw facility, an interest-only period or a packaged arrangement may exist on one loan and not another, or may exist with different fees attached. Moneysmart explains how a mortgage offset account works, how it reduces the interest charged on your loan, and whether it is worth having — worth reading before you trade a feature away for a headline rate.

Why borrowers start looking

Rate is the usual trigger. Moneysmart states plainly that refinancing your home loan to take advantage of a lower interest rate might save you money, and that small differences in your mortgage interest rate can make a big difference to the long-term cost of your home loan.

The size of the gap explains why periodic checks are sensible: Moneysmart notes there can be an interest rate difference of more than 2% in variable home loan rates on the market. That figure describes the spread across products available in the market, not a discount waiting for any individual borrower. What you are offered depends on the loan product, your loan-to-value ratio, how you repay and the lender's policies at the time. The practical reading is that two households with similar properties can be paying materially different amounts each year, and checking is how you find out which one you are.

The other common trigger is a fixed rate ending. Moneysmart's worked example follows Simon and Tiana, whose fixed rate home loan period ends in a few months and whose interest rate will increase. The useful move in that position is to start the review before the fixed period ends, with enough time to compare and apply.

Fixed and variable rates: why the type changes the review

Moneysmart also covers the difference between fixed and variable home loan rates. A fixed rate is agreed for a set period; a variable rate can move over the life of the loan. Neither type is automatically cheaper, and the difference matters most at the point of review:

• If you are on a fixed rate, find out what rate applies when the fixed period finishes and how that compares with what similar loans are offering now.
• If you are on a variable rate, your repayments can change, so the comparison is between your current variable rate and what else is available for a borrower in your position.

In both cases, ask the question in writing so you have the number rather than an impression.

When a review may be worthwhile

Consider a review if one or more of these apply:

• Your fixed rate period ends within the next few months, or has already ended.
• Your current rate looks well above what comparable products advertise for borrowers with a similar loan-to-value ratio.
• Your circumstances have shifted — income changed, a dependent arrived or left, or you are planning a change in how you use the property.
• Your property's value or your equity position has changed materially since you took the loan out.
• You are paying for features you never use, or you lack features you would genuinely use, such as an offset account.
• Your loan is a structure you no longer understand or actively manage.

What to check before switching

Moneysmart sets out what to check before switching home loans. The comparison should cover both sides of the move — what it costs to leave and what it costs to arrive.

Check	Why it matters	Where to confirm it
Exit costs on your current loan (discharge, settlement or deed fees)	These are payable whether or not the switch saves you anything	Ask your current lender for a payout figure and fee list in writing
Entry costs on the new loan (application, valuation, settlement and registration charges)	Upfront costs can outweigh a small rate difference for years	Ask the new lender for a full fee schedule, not just the rate
Early repayment or break costs if your current loan is fixed	Leaving a fixed period early can carry a separate charge	Ask your current lender how it is calculated and request the estimate
Features retained or lost (offset, redraw, repayment flexibility)	A feature you actively use can be worth more than a small rate cut	Compare product documents side by side
Loan term being offered	Restarting a longer term lowers repayments but can raise total interest	Decide deliberately whether to keep your remaining term or reset it
Eligibility and serviceability	The advertised rate is not necessarily the rate you are offered	Go through assessment and get any conditional approval in writing

How to compare without guessing

1. Write down five facts about your current loan: balance, remaining term, current interest rate, annual fees, and features you actually use.
2. Get those same five facts for each loan you are comparing. A "rate" without fees and features is not comparable information.
3. Compare total cost — interest plus fees — at the same loan balance and the same remaining term. Different terms make two loans look further apart than they are.
4. Work out the annual difference first, then multiply over the years you expect to hold the loan. Compare that figure with the upfront cost of moving; the gap between them is your rough payback period. The arithmetic is straightforward, but the inputs have to be real.
5. Ask your current lender what they will do to keep the loan. A retention offer belongs in the same table as any external quote.
6. Note the outcome and set a reminder. Rolling off a fixed rate or a promotional period is predictable, so put the date in your calendar a few months ahead.

Situations that need an extra question

Some structures do not follow the standard path. If your loan has a guarantor, sits under lenders mortgage insurance, is interest-only, is part of a construction or line-of-credit arrangement, or is written as an Islamic finance product, ask both providers what the switching process involves for you specifically. Moneysmart points readers to separate guidance on Islamic finance in Australia, which is the right starting point if you use one of those products.

Your next step

Pick a specific trigger rather than doing this in the abstract. If your fixed rate period ends within six months, that is your date. Otherwise, use your last annual review date or the day you opened your last statement.

On that date, gather the five facts listed above, request a payout figure and fee list from your current lender, then get one or two quotes covering both rate and fees. If two products price out similarly, compare features and flexibility instead. If your situation involves a complex structure, multiple properties or self-employed income, speak to a licensed mortgage broker or a financial adviser who can look at the full picture with you.

To see how different loan structures affect repayments and total cost, the plain-English explainers at /money/home-loans/ cover the mechanics. If you are unsure which features matter most for your circumstances, the short questionnaire at /match/ lists the questions to sort out first.

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This article is general information about home loans in Australia. It does not take account of your objectives, financial situation or needs, and it is not personal financial, tax, credit or legal advice. Rates, fees, eligibility criteria and loan features change, and some products are not available to all borrowers. Confirm current details with the relevant lender and read the product documentation before acting.