What it means to refinance your mortgage

In a nutshell, refinancing means moving your home loan from one lender to another. It’s not a loan transfer, which involves swapping to a different type of home loan, changing your repayments, or splitting and combining loans, all while remaining with the same lender.

Essentially, when you refinance to another lender, it’s considered a whole new loan to them. Because you’re not buying a new home, the process doesn’t involve another vendor or settlement agent, although you do still need to get the property valued.

Before you decide to refinance, it’s worth looking at what your current lender is now offering because there might be a new home loan with more flexible features or add-ons that can help you meet your goals.

Take a look at some reasons to refinance

Often, the first step is to talk to a Lending Specialist. They can outline what’s involved in moving your home loan to the new bank, guide you through the steps in more detail and be on call when you need them.

If you decide to refinance to a new bank, the process is like applying for your first home loan. You can start the application process online or with a Home Finance Manager.

Although it’s not a new loan for you, it will be a new loan for the lender you choose. A valuation of your property will be carried out and you’ll usually need to give them statements on your current home loan, as well as a pay out figure. This is the amount remaining on the loan that will be paid out to your current lender.

You’ll also need to organise a discharge with your original lender. This can take a few weeks so should be organised early. A settlement date will be organised, which is arranged between the two lenders to transfer the mortgage title.

There are a few factors that could mean you won’t be able to refinance your home loan.

If you don’t have a high enough loan to value ratio (LVR), there could be insufficient security against the new loan and a lender might not approve it. This would happen if the property value has decreased or a new valuation assigns it at a lower value. In this case, it’s worth talking to your lender to find out what your options might be. They could include paying Lenders Mortgage Insurance (LMI), which is insurance to protect the lender if you have trouble making your loan repayments in the future.

You may also be outside the new bank’s lending policy, or you may not meet the bank’s credit assessment criteria.

Banks will usually charge a fee for you to discharge your mortgage (this is when the bank's name is removed from your property title). The cost varies from bank to bank and usually takes a few weeks to be processed.

When you refinance your mortgage and your new bank is lending you over 80% of your property's value, you may need to pay LMI.

If you're currently on a fixed rate loan at your bank, you may incur a charge to break that term early. The cost depends on how long is left to run on your fixed term and what your fixed interest rate is. Your current bank will be able to provide an estimated break cost. 

• Reasons to refinance
• How to check you’ve still got the right home loan
  
• Tips to save money on your mortgage