Refinance home loans

Need to refinance your home loan because the loan term has ended, or because you think there are better loan features out there? Finty is your one-stop-shop for loan refinancing advice and comparing available deals.

By Yvonne Taylor   |   Updated 18th March 2020

Comparing refinance home loans for $450,000.00 over 30 years.

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What is a refinancing home loan?

A refinancing home loan is a second or subsequent loan on a property, taken out because the first loan term is about to expire or because the loan agreement will be voluntarily terminated before expiry. A common reason for borrowers to seek refinancing is because one or more features of their current loan – such as the interest rate, loan amount, fees, or other features – may no longer suit them. Put simply, it’s a way of switching your home loan to another lender, or in some cases renegotiating with your current lender, to get a better deal.

Can I access some of the equity I have built up in my home by refinancing?

Yes. This is another common reason for refinancing. You may have reduced your loan principal as a result of the repayments you have made over several years. At the same time your home may have increased in value as a result of a rising property market. If your loan principal has reduced from, say, $400,000 to $370,000, and your home’s value has increased from $500,000 to $615,000, you now have a 40% equity in your home. If you were to refinance with a Loan to Valuation (LVR) ratio of 80%, your refinanced loan principal would be $492,000, your deposit would be $123,000, and you would be able to withdraw $122,000 in cash. You could use that cash for renovations or extensions, or for debt consolidation by paying off debts with a higher interest rate than your home loan, or for any other purpose you chose. But remember that your periodic repayments will now be higher because you have borrowed a larger amount.

What should I do before deciding to refinance a home loan?

Don’t make a rash decision. Take these steps before you decide to jump ship:

  • Ask your current lender for a better deal: If your current lender can retain you as a customer, and you can avoid some of the costs associated with refinancing, everybody wins. Your existing lender may be prepared to offer you a better interest rate, or a different type of interest rate (e.g. changing from a fixed rate to a variable rate), or a different loan term and more flexible features. The more equity you have in your home (i.e. the greater the positive difference between its current value and the amount still owing on your loan) the greater your negotiating capacity will be, so it may be worth waiting until you have at least 20% equity, as a result of your repayments or an increase in the value of the property.
  • Check the cost of refinancing: Switching home loans comes at a cost, so make sure you’re aware of the associated fees, which could include:
    • A loan switching fee if your current lender offers you a better deal
    • A break fee if you’re changing from a fixed rate to a variable rate with your current lender
    • A loan discharge fee if you’re terminating your current loan
    • Loan application/establishment fee if you apply for a loan with a new lender
    • You may have to pay for a new Lenders’ Mortgage Insurance (LMI) policy if your equity in your property is less than 20%, but try asking your current lender for a refund of a portion of any LMI premium you may have already paid
    • Depending on which state you live in, you may need to pay stamp duty to register the new loan. Once you’ve worked out the cost of refinancing, check that it’s not going to be more expensive than sticking with your current loan. Refinancing may be more expensive if you have only a small amount of loan principal (e.g. less than $75,000) or a very short loan term left to repay.
  • Tidy up your credit score: Whether you’re negotiating with your current lender or looking for a new loan, it’s always a good idea to have an attractive credit score since it will make you a desirable customer eligible for a lower interest rate. It pays to take some time to fix your credit score.
  • Compare your options: Check out all the available refinancing home loan offers on this page.

What features should I look at when comparing refinancing home loans?

When comparing available home loan options with each other and with your current loan, these are the features you need to consider:

  • Interest rate: Can you get a lower rate than the one you’re currently paying? Don’t forget to look at the comparison rate (the rate that includes the effect of all fees associated with the loan) for a clearer picture.
  • Loan type: Are you looking for a standard ‘principal and interest’ loan (where your periodic repayments include a portion of the loan principal as well as the interest charges) or an interest-only loan (where you only pay interest charges and do not reduce the loan principal)? If you’re planning to switch to an interest-only loan, consider the possible consequences (explained on our ‘Interest only home loans’ page).
  • Interest rate type: Interest rates can be fixed (never change during the loan term), variable (may change at any time, usually in response to a change in the Reserve Bank of Australia’s official cash rate) or split (part of the loan is subject to a fixed interest rate and the remainder to a variable interest rate). Make sure you’re comparing rates of the same type, and if you’re considering a rate type that’s different from your current loan, consider the advantages and disadvantages of each rate type (explained on our ‘Fixed rate’ and ‘Variable rate’ pages).
  • Loan term: Always look for the shortest term you can afford without putting your budget under too much strain, since your interest costs during the life of the loan will be much lower if you have a shorter term. You may want to consider asking your prospective new lender for a term that is equal to the term that remains on your existing loan. Or ask for a shorter term so that you can make larger repayments and pay the loan off faster, or for a longer term if you want your periodic payment amount to go down.
  • Other loan features: A fixed interest loan may have few features, but with a variable rate loan you may be offered features like an offset bank account (where your spare cash reduces the amount of interest you pay because it’s offset temporarily against the loan principal), or the ability to make extra repayments (to pay the loan off faster and reduce interest costs), or a redraw facility (letting you withdraw cash if necessary from your loan account if you’re ahead with your repayments). There may be fees associated with these extra features.
  • Switching incentives: Some lenders will offer cashback or other incentives to borrowers in order to persuade them to refinance their loan. This can be a useful way of reducing the cost of refinancing, but make sure that the loan you are applying for has all the competitive features you need.

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