Refinancing: What Not to Miss When Switching Lenders

Refinancing means switching your existing home loan to a different product or lender to reduce costs, access equity, or improve loan features. The decision to refinance typically makes sense when you can lower your interest rate by at least 0.5%, need to access equity for another purpose, or want features your current loan doesn't offer.

Many Altona homeowners who purchased in the area during the pandemic refinanced within two years as property values increased and competitive lending returned. The suburb's mix of established homes near the foreshore and newer builds closer to Millers Road means property valuations can vary significantly, which directly affects how much equity you can access when refinancing.

How Refinancing Works in Practice

Refinancing involves applying for a new home loan and using it to pay out your existing one. Your new lender settles the outstanding balance with your current lender, and you start making repayments under the new loan terms. The process typically takes three to six weeks from application to settlement, depending on how quickly you can provide documentation and whether your property requires a formal valuation.

In our experience, refinancing takes longer when the property is in a location where recent sales data is limited or when the borrower has changed employment recently. Altona's established areas near Pier Street generally have strong comparable sales data, which can speed up the valuation process.

When the Numbers Actually Stack Up

You should refinance when the financial benefit exceeds the costs involved. Consider someone with a $500,000 loan paying 6.2% who refinances to 5.7%. Over the remaining loan term, the interest saved would be substantial, even after accounting for discharge fees from the old lender and application fees for the new one. Most lenders charge between $300 and $600 in discharge costs, and some new lenders offer to cover these as part of a refinance package.

Refinancing also makes sense when your fixed rate period is ending and the revert rate is significantly higher than what's available elsewhere. Many borrowers who fixed during the pandemic are now reverting to variable rates above 6%, while new variable rates may be lower depending on the lender and loan features.

Accessing Equity Without Selling

Refinancing allows you to access equity in your property without selling it. If your Altona home has increased in value and you've paid down the loan balance, you may be able to borrow against that equity for purposes like purchasing an investment property, funding renovations, or consolidating other debts.

Lenders typically allow you to borrow up to 80% of your property's current value without paying lender's mortgage insurance. If your property is valued higher than when you purchased, and you've reduced your loan balance through regular repayments, the difference between 80% of the new valuation and your current loan balance is the equity you can access. For investment purposes, some borrowers look at investment loans structured separately from their primary home loan to keep the debt quarantined for tax purposes.

What Happens to Your Offset and Redraw

When you refinance to a new lender, your offset account and redraw balance with the old lender close as part of the discharge process. Any funds in your offset account remain yours and should be transferred before settlement. Redraw balances can usually be withdrawn before you refinance, but some lenders restrict access to redrawn funds during the discharge period, so check this before you start the application.

If you've been using an offset account to reduce interest, make sure your new loan includes one. Not all refinance products come with offset accounts, and some charge monthly fees for the feature. The value of an offset depends on how much you keep in it. Someone keeping $30,000 in an offset account on a loan charging 5.7% saves around $1,710 a year in interest.

The Refinance Application Process

The application requires income verification, identification, and details of your current loan and property. Lenders assess your borrowing capacity based on your income, expenses, and existing debts. If your financial situation has changed since you took out your original loan, such as a reduction in income or an increase in other debts, this may affect how much you can borrow.

Most lenders will arrange a property valuation as part of the application. In Altona, properties near the beach or with views of the bay often receive higher valuations than those further inland near the industrial areas along Kororoit Creek Road. The valuation determines your loan-to-value ratio, which affects your interest rate and whether you need to pay mortgage insurance.

Switching Between Fixed and Variable Rates

Refinancing gives you the option to switch from a variable rate to a fixed rate, or vice versa. If you're currently on a variable rate and expect rates to rise, you might fix part or all of your loan. If you're coming off a fixed rate and want flexibility to make extra repayments without penalty, a variable rate may suit you now.

Some borrowers split their loan between fixed and variable portions to balance certainty with flexibility. This approach lets you lock in a portion of your repayments while keeping access to features like offset accounts and unlimited extra repayments on the variable portion. A home loan health check can help you decide which structure works for your current situation.

Costs You'll Pay When Refinancing

Refinancing involves discharge fees from your current lender, application fees for the new lender, and sometimes valuation fees or settlement fees. Discharge fees are usually between $300 and $600. Application fees vary by lender, with some waiving them as part of a refinance offer. If your property needs a formal valuation, expect to pay between $200 and $400, though some lenders cover this cost.

If you're refinancing during a fixed rate period rather than at expiry, you may also be charged break costs. These can run into thousands of dollars depending on how much time remains on the fixed term and how much rates have moved since you fixed. Always request a break cost estimate from your current lender before you proceed.

Consolidating Debts into Your Mortgage

Refinancing can be used to consolidate other debts such as personal loans, car loans, or credit cards into your home loan. This reduces your overall interest rate because home loan rates are typically lower than unsecured debt rates. However, you're also extending the repayment term, which means you may pay more interest over time even at a lower rate.

Consider a scenario where someone has $20,000 in credit card debt at 18% and consolidates it into their mortgage at 5.7%. The monthly interest cost drops significantly, but if that $20,000 is repaid over the remaining 25 years of the mortgage instead of being cleared in a few years, the total interest paid can be higher. The key is to continue making the same repayment amount you were making before consolidation, so the additional funds go toward reducing the principal faster.

For Altona residents, refinancing can be a practical way to reduce costs or access equity, particularly if your property value has increased since purchase or your current loan no longer suits your needs. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions