What is refinancing and how does it work
Refinancing means replacing your existing home loan with a new one. The new loan pays out the old one in full, and you begin making repayments on the new terms. The new loan can be with your existing lender or with a different one entirely.
People refinance for different reasons. The most common is to secure a lower interest rate and reduce monthly repayments. Others refinance to access equity that has built up in their property, to consolidate other debts, to switch loan features (such as adding an offset account), or to change from a variable rate to a fixed rate or vice versa.
In NSW, the refinancing process is largely the same as applying for a new home loan. Your lender will assess your income, expenses, liabilities, and the value of your property. If you are switching lenders, a property valuation will typically be required. The existing loan is discharged and the new loan is registered on the title.
Key point
Refinancing does not change your property ownership or the remaining balance owed. It only changes the terms of the debt , who you owe it to, at what rate, and on what structure.
When refinancing makes sense
The most straightforward trigger is a meaningful gap between your current interest rate and what is available in the market. In Australia, lenders routinely offer better rates to new customers than they do to existing ones. This practice, known as the loyalty tax, means long-term borrowers often pay more than necessary without realising it.
As a general guide, a rate difference of 0.3% or more on a $500,000 loan is worth investigating. On a $700,000 loan, that gap represents roughly $2,100 per year in additional interest. Over five years, that is $10,500 in unnecessary cost.
Beyond rate, refinancing may be appropriate when:
- Your fixed rate period is ending and the revert rate is significantly above market
- Your income or financial circumstances have improved and you qualify for better products
- Your property has increased in value and you want to access equity
- You want to consolidate high-interest debts into your mortgage
- Your current loan lacks features you now need, such as an offset account or redraw facility
- You are approaching a major life change (renovation, investment purchase) and want to restructure
When refinancing does not make sense
Refinancing is not always the right move. If you have a fixed rate loan with significant break costs, refinancing before the fixed period ends can cost more than it saves. Similarly, if you are close to paying off your loan, the interest savings over a short remaining term may not justify the upfront costs.
If your financial circumstances have deteriorated since your original loan was approved , reduced income, increased liabilities, or a property that has fallen in value , you may find it difficult to refinance at all, or may only be offered unfavourable terms.
What refinancing actually costs in NSW
One of the most overlooked aspects of refinancing is the upfront cost. The savings look compelling on paper, but the costs can absorb months of benefit if you are not careful.
Common costs include:
- Discharge fee: Charged by your existing lender to close your loan. Typically $150 to $400.
- Break costs: If you are on a fixed rate, breaking early can cost thousands depending on the loan balance, remaining term, and interest rate movements. Always request a break cost quote before proceeding.
- Application or establishment fee: Charged by the new lender. Many lenders waive this for refinancers, but some charge up to $600.
- Valuation fee: Your new lender may need to value the property. Some lenders use automated valuations at no cost. Physical valuations typically cost $300 to $600.
- Legal or settlement fees: Some lenders charge for the legal work involved in registering the new mortgage. Often $100 to $300.
- Lenders Mortgage Insurance: If your equity has not reached 20% of the current property value, you may need to pay LMI with the new lender even if you paid it previously. This can be a significant cost.
Watch out for LMI on refinance
LMI is not transferable between lenders. If your loan-to-value ratio is above 80%, you may be required to pay LMI again when refinancing. This is one of the most common hidden costs that catches borrowers off guard. Always check your current LVR before proceeding.
Break-even calculator
Use this calculator to see how long it will take to recoup the upfront cost of refinancing through monthly savings.
The refinancing process step by step
Understanding what happens at each stage helps you plan the timing and avoid unnecessary delays.
Step 1: Review your current loan
Before comparing options, know exactly what you have. Request a loan statement from your current lender showing your balance, current rate, loan type, and any applicable break costs or early exit fees. This gives you a clear baseline to compare against.
Step 2: Assess the market
Comparison sites give you a broad picture, but lender policies vary significantly. A rate advertised online may not be available to borrowers with your specific income type, LVR, or loan purpose. Working with a mortgage broker who has access to multiple lenders gives you a more accurate picture of what you can actually access. For borrowers in NSW, Lend & Loan works across more than 50 lenders to identify which products are genuinely available for your situation.
Step 3: Calculate the true cost
Use the break-even calculator above to confirm the savings justify the costs. Factor in all fees, not just the interest rate difference.
Step 4: Submit your application
Your new lender will require income documentation, bank statements, details of existing debts, and property information. The assessment process typically takes one to three weeks depending on the lender's current workload and the complexity of your application.
Step 5: Property valuation
Most lenders will conduct an automated or physical valuation of your property. If the valuation comes in lower than expected, your LVR may be higher than anticipated, which can affect the rate you are offered or trigger LMI requirements.
Step 6: Formal approval and settlement
Once approved, your new lender will arrange settlement with your existing lender. Your existing loan is discharged, the new mortgage is registered, and your repayments begin under the new terms. This process typically takes two to four weeks from formal approval.
Common mistakes when refinancing
The most frequent errors are avoidable with preparation.
Focusing only on the interest rate. A lower rate with a higher annual fee, no offset account, or restrictive terms can be worth less than a slightly higher rate with better features. Always compare the comparison rate, not just the headline rate.
Not accounting for LMI. If your LVR is above 80%, LMI can cost more than a year of interest savings. Always check your equity position before assuming refinancing is straightforward.
Applying to multiple lenders simultaneously. Each application creates a hard inquiry on your credit file. Multiple inquiries in a short period signal financial stress to lenders and can reduce the rate you are offered. Compare before applying formally.
Ignoring fixed rate break costs. Break costs on fixed rate loans can be substantial. Some borrowers have encountered break costs of $10,000 to $30,000 on large loans with long fixed terms. Always request a written break cost quote before committing to refinance a fixed rate loan.
Refinancing too close to loan payoff. If you have five years remaining on your loan, the total interest saved is much smaller than on a loan with 20 years remaining. The upfront costs of refinancing may not be worth it at this stage.