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Key takeaways:
- Refinance rates in Australia start from 5.80% p.a. (comparison rate* 5.83% p.a.)
- Australians save approximately $1,524 a year by refinancing, according to PEXA Refinancer Sentiment Research.
- The managing director of a leading mortgage broker association explains that while refinancing to a lower interest rate is important, it’s also crucial to evaluate the fees, features and total cost over the loan term to ensure you’re getting a good deal.
What is refinancing?
Refinancing is the process of replacing an existing home loan with a new loan from either the same lender or a different one. Most borrowers in Australia refinance their home loan to secure a lower interest rate, reduce their repayments, or to access equity for other purposes like renovations or investments.
Refinancing to a more competitive deal can save borrowers thousands of dollars in interest over the loan’s term.It can also be an effective way of paying off a mortgage faster, particularly if you choose to refinance to a shorter loan term than what you’re currently on.
How does home loan refinancing work?
Mortgage refinancing involves securing a new home loan to replace your existing mortgage. This process can include moving to a different lender or choosing to refinance with your current lender, often moving to a loan product with better repayment terms or additional features such as an offset account or redraw facility that your current mortgage may lack.
When you refinance, your current home loan is closed, and any remaining balance is transferred to the new loan, which you continue to repay.
Most mortgage brokers recommend reviewing your home loan annually and to refinance every two to three years to ensure you’re still getting a fair deal. A good mortgage broker will explore your current situation and present you with the most suitable loan options. They’ll also provide you with a breakdown of all the costs involved, helping you determine if refinancing is worthwhile.
Fact: As of May 2024, the average refinance home loan in Australia was $559,822. In that month, $11.481 billion worth of loans refinanced to new lenders, while $7.875 billion switched loans with the same lender, according to the latest data from the ABS.
10 reasons why people refinance their mortgage
Here are ten reasons why Australians choose to refinance their mortgage:
1
Switching to a better interest rate
Refinancing to a lower rate can mean big savings on interest charged over the loan’s term.
2
Consolidating debt
Refinancing allows borrowers to consolidate high-interest debt, such as credit cards or personal loans, into their mortgage. This can reduce overall interest costs and simplify repayments.
3
Accessing equity
Homeowners may refinance to unlock the equity built up in their property. Tapping into equity can be used for renovations, investments, or other large expenses.
4
Changing loan features
Switching to a new loan may benefit different lifestyles and financial situations as it can have features attached, like offset accounts, a redraw facility, or flexible repayment options.
5
Reducing minimum repayments
Some borrowers refinance to extend their loan term or restructure their repayments in a way that helps free up cash flow to pay for other expenses, such as medical bills.
6
Escaping high fees or restrictions
Refinancing can help homeowners escape high fees or restrictive terms imposed by their current lender, seeking better terms and conditions elsewhere.
7
Fixed rate expiry
When a fixed-rate term is nearing its end, borrowers may refinance to secure a new rate or switch to a variable rate to take advantage of potential interest rate movements.
8
Locking in a fixed rate
On the flip side of the last point, if you’re currently on a variable rate but want to switch to the certainty of a fixed rate, a refinance would be required.
9
Reorganising finances after divorce or separation
If you shared a mortgage with a partner but have since separated, you'll typically need to refinance in order to buy out the other person's stake in the home. Many lenders do not permit the removal of a joint applicant from the loan.
10
Improved customer service
Switching to a new bank or specialist lender can also be motivated by searching for better customer service or more responsive support.
How to refinance a home loan using a mortgage broker
One of the advantages of using a mortgage broker is that they’ll guide you through the refinance process. Here are the steps you’ll likely take:
Step 1
Evaluate your current mortgage terms, interest rate and features. Consider whether refinancing makes sense based on your goals, such as reducing monthly/fortnightly repayments, paying off the loan faster, or accessing cash for renovations or other expenses.
Step 2
Contact your preferred mortgage broker. There are mortgage brokers in Sydney, Melbourne, Brisbane, Adelaide, Perth, and right across Australia who can talk you through your refinance options.
Step 3
After discussing your needs and goals with your broker, they’ll typically present you with three to five suitable refinance loan products. They’ll walk you through and compare the interest rates, loan term, features, and any other relevant factors.
Step 4
You’ll need to request a ‘discharge form’ from your current lender. This is the document you need to submit to inform them that you’re leaving. In the meantime, you may receive a call from your current lender’s retention team, who will likely try to match the rate from your new lender to keep your business.
Step 5
Once you’ve chosen a new loan, your broker will submit an application to the lender on your behalf. You’ll need to provide documentation, such as two recent payslips, bank statements for the last three months, a notice of assessment (NOA) from the ATO, details about your current home loan and proof that your property is insured.
Step 6
The lender will conduct an appraisal of your property to determine its current market value. They’ll also review your application, check your credit and documentation to assess the risk of lending to you.
Step 7
Your broker will update you on the status of your application. If approved, you’ll receive a loan estimate outlining the terms of the new loan, including the interest rate, fees, term, features and minimum repayments. You review and sign the loan documents, and the lender disburses funds to pay off your existing mortgage.
Step 8
Your old mortgage is paid off and you start making payments on the new loan. Over the next six to 12 months, your mortgage broker will likely be in touch to review your new loan and advise if it’s still a good deal.
Does refinancing save you money?
Below is a straightforward example of how much you could save by refinancing your home loan to a lower rate, with one year shaved off the loan term.
Loan balance | |
Current home loan | $750,000 |
Refinance home loan option 1 | $750,000 |
Refinance home loan option 2 | $750,000 |
Refinance home loan option 3 | $750,000 |
Interest rate | |
Current home loan | 6.25% p.a. |
Refinance home loan option 1 | 6.15% p.a |
Refinance home loan option 2 | 6.00% p.a. |
Refinance home loan option 3 | 5.95% p.a. |
Loan term | |
Current home loan | 27 years |
Refinance home loan option 1 | 26 years |
Refinance home loan option 2 | 26 years |
Refinance home loan option 3 | 26 years |
Minimum monthly repayments | |
Current home loan | $4,798 |
Refinance home loan option 1 | $4,823 |
Refinance home loan option 2 | $4,753 |
Refinance home loan option 3 | $4,730 |
Interest payable over the loan term | |
Current home loan | $804,427 |
Refinance home loan option 1 | $754,564 |
Refinance home loan option 2 | $732,804 |
Refinance home loan option 3 | $725,584 |
How much interest you’d save on the loan term | |
Current home loan | Nil |
Refinance home loan option 1 | $49,863 (roughly $1,917 a year) |
Refinance home loan option 2 | $71,623 (roughly $2,754 a year) |
Refinance home loan option 3 | $78,843 (roughly $3,032 a year) |
| Current home loan | Refinance home loan option 1 | Refinance home loan option 2 | Refinance home loan option 3 | |
|---|---|---|---|---|
Loan balance | $750,000 | $750,000 | $750,000 | $750,000 |
Interest rate | 6.25% p.a. | 6.15% p.a | 6.00% p.a. | 5.95% p.a. |
Loan term | 27 years | 26 years | 26 years | 26 years |
Minimum monthly repayments | $4,798 | $4,823 | $4,753 | $4,730 |
Interest payable over the loan term | $804,427 | $754,564 | $732,804 | $725,584 |
How much interest you’d save on the loan term | Nil | $49,863 (roughly $1,917 a year) | $71,623 (roughly $2,754 a year) | $78,843 (roughly $3,032 a year) |
Tip: Some mortgage brokers may default to extending your loan term back to its original term (25 or 30 years). If possible, aim to shorten the loan term one year less than your current home loan term. For example, if you have 27 years remaining, ask your broker to adjust the refinance home loan term to 26 years. In some cases, this adjustment may slightly increase your repayments but can lead to significant interest savings over the remaining loan term.
Refinancing pros and cons
- Refinancing can help you secure a lower interest rate, potentially reducing your repayments and overall interest costs
- You can tap into equity built up in your home to access funds for renovations, investments or other financial needs
- Can provide access to better features such as offset accounts, redraw facilities or flexible repayment options that weren’t available with your previous loan
- An opportunity to change loan terms (e.g. switching from a variable to fixed rate) to better align with your financial goals and circumstances
- Refinancing to a new home loan with a mortgage broker is usually free of charge as the broker is paid a commission from the lender, plus they streamline the entire process
- Refinancing can incur costs such as discharge fees from your current lender and application fees for the new loan
- The process of refinancing requires a credit inquiry, which may temporarily lower your credit score
- Extending your loan term to lower monthly repayments may result in paying more interest over the life of the loan
- If you plan to sell in the near future, the upfront costs of refinancing may outweigh the potential savings from a lower interest rate
- If you’re not using a mortgage broker, refinancing can be a time-consuming process
Refinancing with a broker: Tips from an industry expert
We spoke to Peter White AM, Managing Director of the Finance Brokers Association of Australia (FBAA), to explore the benefits of refinancing with a mortgage broker. Here’s what he had to say:
- Focus on more than the rate “Refinancing, just like the initial mortgage, should not be based solely on interest rates. The individual circumstances of the borrower must be taken into consideration, which is why it’s best to see a mortgage broker, as they are obliged by law to act in the best interests of their customers. Banks are not governed in this manner and will seek to sell you a product even if the product may not be the best option for your circumstances. Because your circumstances and lifestyle changes, things like future plans and goals should be considered to ensure the loan you get works for you.
- Compare multiple lenders “A mortgage broker will source various options that suit your needs, and then they will work with you and guide you as to the options. A broker also has many more options available than you may realise, including non-bank lenders, many of which don’t deal directly with the public.
- Let your broker do the leg work “Once you've decided on the loan that best suits you, your mortgage broker will take the stress out of the process and do all the work for you. Your role is to simply provide the information requested to complete the application process. The good news is that using a mortgage broker comes at no cost to the borrower. They are professionals in the home loan sector and are highly trusted, which is why more than 70% of mortgages are written through a broker.”
Refinance case study
Let’s say you’re a self-employed individual with a mortgage of $500,000 on a variable interest rate of 6.35% p.a. You see a competitive home loan product offering a 5.95% p.a. rate with another bank and submit an enquiry. The bank informs you that while they do accept self-employed borrowers, the advertised interest rate will likely be higher in your scenario.
That’s when you contact a broker and express your desire to refinance to a lower rate as well as to gain access to an offset account, as your current home loan does not have this feature.
Given you’re self-employed and have low documentation (i.e. no employer payslips) to satisfy most lender criteria, your mortgage broker does the legwork and works out which lenders are your best fit.
In most cases, the broker will know which banks, credit unions and specialist lenders are offering the most competitive deals according to your circumstances. During the refinance, your broker will save you a lot of time and effort, updating you every step of the way to ensure a smooth transition.
Refinance cashback offers: Is there a catch?
Some banks and lenders offer cashback deals to encourage borrowers to refinance their loan with them. While this can give your savings a quick boost, it’s worth considering the total value of the cashback offer.
For example, a $3,000 cashback on a home loan might include additional fees or charges that could offset the savings you gain from switching. Always compare the overall costs and benefits before deciding to refinance based on a cashback incentive alone.
Is refinancing worth it in Australia?
One major reason to consider refinancing is to secure a lower interest rate as you can potentially save thousands of dollars over the life of your mortgage. This can free up more money each month for other expenses or savings. Additionally, refinancing allows you to adjust your loan terms or switch to a different type of loan that better suits your current financial situation.
For example, you might refinance to move from a fixed rate to a variable rate as your fixed-rate loan is about to expire and you’re being shifted onto a much higher rate.
However, refinancing isn’t always the best choice for everyone. It can involve upfront costs such as application fees, valuation fees, and potentially exit fees from your current lender. These costs need to be weighed against the potential long-term savings. Refinancing may also not be worthwhile if you plan to sell your property in the near future.
Talking to a mortgage broker and exploring your options can be helpful in most situations. That’s because they can provide valuable guidance on whether refinancing is a good financial decision based on your individual circumstances and goals.