What is refinancing?
A guide to how refinancing works
Updated 30 April 2024
Refinancing explained
What is refinancing?
Refinancing is the process of switching your current mortgage to a different home loan lender, usually to obtain a lower interest rate and save money. Generally, the same security used for the current loan is used as security for the new home loan.
While you can refinance with the same lender, this will likely be a home loan re-negotiation rather than a full refinance. It’s more common to refinance a home loan using a different provider, whether that’s because there’s been a change in your personal or financial situation, or because you simply want a better deal.
Why would I refinance?
Refinancing can be helpful for making sure your home loan suits your needs and can also serve as an effective cashflow management tool.
Refinancing could help you:
- Secure a lower rate on your home loan
- Consolidate other, higher-interest debts into your home loan
- Unlock equity you’ve built up in your property in the form of cash.
When refinancing, depending on your home equity and credit history, you may have the option to borrow additional funds and increase the size of your home loan. This will also be influenced by your borrowing power which is largely determined by current interest rates and your disposable income.
These additional funds could be used to pay other debts or for home improvements and/or renovation works on your property. Home loan interest rates are typically much lower than those of credit cards and personal loans, so rolling those sorts of debts into your home loan (if possible) could possibly lead to interest savings. It can also make things simpler, leaving you with one loan to manage instead of several.
Many people who refinance want to keep their loan amount more or less the same but secure a better interest rate (and subsequently lower monthly repayments) and/or lower fees. They might also be looking for a different type of home loan (e.g. fixed rate vs variable rate) or looking for a feature their current home loan doesn’t offer, such as an offset account or a redraw facility.
For example, if you took out a home loan with less than a 20% deposit or you had an unfavourable credit report, you might’ve been saddled with a higher interest rate or higher fees or other costs, such as Lender’s Mortgage Insurance (LMI), when you first took out the loan. If you’ve been meeting your regular home loan repayments, you could potentially refinance and negotiate a more favourable rate.
Either way, prospective refinancers should ensure they’re refinancing to a home loan that suits their financial situation and priorities. A good starting point is deciding what you want from your home loan and letting that guide your decision-making process.
How does refinancing work?
The first step when looking to refinance is checking what kinds of fees your current lender might charge you for switching home loans and what the process involves. Depending on your current lender and the type of loan you have, you may have to pay a break fee or other closing costs to refinance.
Once you’ve figured out what your refinancing costs might look like, you’ll want to compare a wide range of home loan options to determine which ones could suit you. Once you’ve found one you like, you can apply to refinance your existing loan.
An external refinance will generally involve receiving formal approval from your new lender, sending a discharge form to your old lender to notify them of your refinance and telling them which lender to release your home loan to. You may also pay an application fee for the new mortgage.
Meet our home loans expert, Stephen Zeller
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Home Loan Specialists, and reviews and contributes to Compare the Market’s banking-related content to ensure it’s as helpful and empowering as possible for our readers.