How to refinance your home loan

Refinancing means replacing your existing home loan with a new one, usually with a different lender, to get a lower rate, unlock features you do not currently have, or access equity you have built up. It is not a new purchase, so there is no stamp duty and no deposit. You are swapping one debt for a cheaper one against the same property.

The reason people do it is unglamorous but consistent. Lenders compete hardest for new business, which means the lowest rates go to people walking in the door, not to people already inside. Over a few years an untouched loan quietly drifts above the market rate, a pattern widely described as the loyalty tax. Nothing announces it, and your repayments do not change, so most borrowers never notice.

The test takes five minutes. The current rate is on the latest statement or in the banking app, and the comparison is against what is available now for a borrower with the same loan size and deposit. That difference is the rate gap, and it is the number that decides whether refinancing pays.

On the numbers, a gap of 0.50% or more on a substantial balance usually repays switching costs within the first year. Below 0.25%, the switching costs may not be repaid quickly, unless the new loan also adds a feature such as a full offset account.

Balance size changes the maths as much as the gap does. The same 0.50% gap is worth about $500 a year on a $100,000 balance and about $4,000 a year on an $800,000 one. Early in a large loan, the saving from a rate gap is at its largest.

Refinancing is not free, but the costs are smaller and more predictable than most people expect. They fall into three groups: what your old lender charges to release the loan, what the new lender charges to establish it, and what the state charges to update the title.

The usual costs, each of which lenders can confirm in writing:

• Discharge fee from your current lender, typically $150 to $400, to close the loan and release the mortgage.
• Application or establishment fee from the new lender, commonly $0 to $600. Many lenders waive this to win refinances.
• Valuation fee of roughly $200 to $400, though lenders frequently absorb it or use an automated valuation at no cost.
• Government mortgage registration and discharge fees, usually about $250 to $500 combined, set by your state or territory land registry.
• Break costs if you are exiting a fixed-rate loan before the fixed term ends. These are the one large, unpredictable cost in the list, and they can run to thousands.
• Lenders Mortgage Insurance again, if your equity has fallen below 20%. This is rare when property values have risen.

For a standard variable loan the realistic total is $500 to $1,500. Set against a meaningful rate gap that is repaid quickly, which is why many variable-rate borrowers review their rate every year rather than waiting for a reason.

Fixed-rate loans are the genuine exception. Break costs are not a penalty the lender chooses, they are a calculation of what the lender loses by having to re-lend your money at current rates, so they get large precisely when market rates have fallen below your fixed rate. Lenders give a written break cost figure on request. Within a few months of the fixed term ending, the break cost is usually small or the term ends first.

From first phone call to settlement, a straightforward refinance takes two to six weeks. Most of that is waiting on the two lenders to talk to each other, not on you. The order matters, particularly the first two steps:

1. The current rate and balance. Both are on the latest statement. The figure that matters is the actual rate being paid, not the rate at sign-up, because discounts expire.
2. A rate review with the current lender. Retention teams can reprice an existing loan, often against a specific competitor rate. A request costs nothing, takes one call and leaves no mark on the credit file. If the lender matches, there is nothing to switch.
3. What is actually available for the loan size, deposit and loan purpose, on the comparison rate rather than the advertised rate, so fees are included.
4. Documents. Lenders ask for recent payslips, or two years of tax returns if self-employed, the latest home loan statements, ID, and a summary of other debts and living expenses.
5. The application. Every formal application is recorded on the credit file, and a cluster of applications in a short window works against the applicant.
6. The new lender values the property and issues formal approval. An automated valuation can be same-day; a full inspection takes about a week.
7. The lenders settle between themselves. The new lender pays out the old loan and registers its mortgage. The borrower generally does nothing on the day.
8. The first statement. It shows the rate, the term and any offset account. Errors are uncommon but they are much easier to fix in the first month.

The step people skip is the second one. Retention teams exist because keeping an existing borrower is far cheaper for a lender than acquiring a new one, and they hold discounts that are not advertised anywhere. They respond to a specific competitor rate more than to a general complaint about a rate.

Most refinances that disappoint do so for one of a small number of reasons, and all of them are visible in advance.

The five that cost people the most:

• Resetting the loan term. Covered above, and the most common. A lower repayment over a longer term is not a saving.
• Chasing a cashback instead of a rate. A one-off payment is easy to see and a rate gap is not, but the rate compounds. A cashback is only ahead when the rates are close, and most carry a clawback period that penalises you for switching again.
• Equity below 20%. A loan above 80% of the property value can trigger Lenders Mortgage Insurance again, and it is not transferable from your old loan.
• Refinancing while your credit file is busy. Applications for credit cards, personal loans or buy now pay later in the months before you apply can weigh on the assessment.
• Consolidating other debts into the mortgage without changing the term. Rolling a five-year car loan into a 25-year mortgage lowers the monthly cost and raises the total interest substantially. It is a trade-off rather than a saving.

One more worth naming, because it is invisible: the introductory rate that reverts. Some prominently advertised loans carry a discount that expires after one or two years, after which the loan sits on a standard variable rate that may be well above what you left. The revert date is in the loan terms from the day it settles.