Changing Home Loans: Reduce Repayments and Optimise Your Mortgage

Switching home loans has become a common consideration for many Australian borrowers aiming to reduce their repayments or access more flexible loan features. However, it’s a decision that should be carefully assessed, as it involves costs, eligibility checks, and weighing up both short- and long-term financial impacts. 

In this guide, Trusted Finance Solutions will explain what to think about when deciding if refinancing is the right choice for you.

Why More Australians Are Considering Switching Home Loans

More Australians are now looking at refinancing. As the Reserve Bank of Australia (RBA) changes the cash rate, lenders change home loan rates too. This has led many people to compare loans and search for better deals.

Several key factors driving this trend include:

Competitive lending market

Non-bank lenders and smaller institutions have been offering competitive rates and attractive loan packages, encouraging borrowers to explore their options. Borrowers now have more power to negotiate or switch, given the increased presence of lenders outside the Big Four banks.

Rising cost of living pressures

With household budgets stretched by inflation and interest rate rises, refinancing could help lower monthly repayments for some Australians. In some cases, reducing mortgage repayments could free up cash flow to manage rising utility, grocery, and fuel costs.

Growing borrower awareness

Access to online comparison tools and independent mortgage brokers has made it easier for homeowners to assess alternative products and identify potential savings. Australians are now leveraging digital platforms and broker networks to access tailored loan comparisons within minutes.

Evolving borrower needs

Life events such as expanding a family, changes in employment, or property upgrades often prompt homeowners to reassess whether their current loan still aligns with their goals. A growing family, for instance, may require a loan with more flexible repayment options to adapt to fluctuating household expenses.

Understanding When It May Be Time to Switch Home Loans

While refinancing can be a strategic move, timing is critical. Some common scenarios where switching home loans might be worth considering include:

Your interest rate is no longer competitive

If you’re on a higher-than-average rate, particularly after a fixed term has expired, you may be paying more than necessary. For example, when a fixed-rate loan ends, you might switch to a standard variable rate and miss out on lower rates offered elsewhere.

You need different loan features

Borrowers who need an offset account, redraw facility, or more flexible repayment terms might find that switching lenders offer these benefits. An offset account, for example, can lower the interest you pay by linking your savings to your loan.

Your financial situation has improved

An increase in your income or reduction in other debts could allow you to negotiate better terms elsewhere. Improved serviceability can strengthen your application and may even unlock access to premium loan products with lower rates.

Your lender’s service is lacking

Poor customer service or limited online banking options may push borrowers to explore alternatives. A lender that lacks modern digital services or provides slow turnaround times may not suit borrowers with complex or time-sensitive needs.

Equity release or debt consolidation

Accessing built-up equity or rolling high-interest debts (e.g., credit cards, personal loans) into your mortgage can be reasons to refinance. Using home equity for renovations or investments can potentially add long-term value to your property, but requires careful planning.

How Does Refinancing Work in Australia?

The refinancing process in Australia follows a series of key steps:

1. Assess your current loan

Review your existing interest rate, fees, and remaining loan term to understand your starting point. Having clarity on your current loan’s performance helps benchmark whether switching is likely to provide a net benefit.

2. Compare home loan products

Use tools like comparison websites or work with a mortgage broker in Melbourne to find a loan suited to your goals, whether it’s a lower rate or better features. A broker can often access rates or lender rebates that may not be directly available to the public.

3. Submit a refinancing application

Like your original mortgage, the new lender will assess your income, expenses, credit history, and property value. Expect lenders to scrutinise your debt-to-income ratio and credit score to gauge your ability to service the new loan.

4. Property valuation

The new lender will arrange a valuation to ensure the property meets their lending criteria and helps determine your loan-to-value ratio (LVR). If your LVR exceeds 80%, the lender may apply additional risk margins or require you to pay the Lender’s Mortgage Insurance (LMI).

5. Approval and settlement

Once approved, your new lender will handle the discharge of your old mortgage and register the new loan. Settlement is generally managed between the two lenders, but it’s advisable to monitor communication to avoid settlement delays.

6. Set up your new loan

Ensure you activate new features like online banking, offset accounts, or direct debits for repayments. Taking advantage of these features early could help streamline your repayments and potentially reduce interest over time.

Costs Involved in Switching a Home Loan

While refinancing can offer potential savings, upfront costs must be carefully considered. Some common expenses in Australia include:

Break fees

If you’re exiting a fixed-rate loan early, your current lender may charge a break fee (can vary depending on time left in the fixed term). Break fees can sometimes negate the potential interest savings if switching during a high fixed-rate period.

Discharge fees

Lenders often charge between $150 and $400 to formally discharge the old mortgage. This fee covers the administrative process of ending your current mortgage contract and removing the lender’s registration.

Application or establishment fees

The new lender may charge setup fees, typically ranging from $200 to $700, though some lenders waive these as part of promotional offers. It’s worth negotiating with the new lender, as some may offer cashback incentives to help offset upfront costs.

Government charges

Mortgage registration and transfer fees vary by state or territory. For example, in NSW, mortgage registration can cost around $160. These statutory fees apply regardless of the lender and should be factored into your switching budget.

Lender’s Mortgage Insurance (LMI)

If refinancing pushes your LVR above 80%, you may need to pay LMI again, which could significantly increase costs. Even if you paid LMI with your current lender, it generally isn’t transferable to your new loan.

Valuation fees and legal costs

Some lenders cover the valuation fee, but where charged, it typically ranges from $200 to $600 depending on the property. Obtaining a favourable valuation can be crucial to maintaining an LVR below 80% to avoid additional costs.

Potential Benefits of Refinancing Your Home Loan

Refinancing may present various advantages depending on your circumstances:

Lower interest rates

A reduced rate could potentially decrease monthly repayments and reduce total interest over time. A 0.5% rate cut could save thousands of dollars over the life of a typical 25-30 year loan.

Access to new features

Some borrowers switch to loans offering features like offset accounts, which may help reduce the interest paid on the mortgage. An active offset account may significantly cut the effective interest you pay if you regularly maintain a healthy balance.

Debt consolidation

Refinancing could allow you to combine other debts (e.g., personal loans or credit cards) into your home loan, potentially simplifying repayments. By rolling short-term, high-interest debts into your mortgage, you might reduce overall repayment stress, though total interest paid could increase depending on the loan term.

Flexibility to change loan structure

Switching from a variable loan to a fixed-rate loan, or vice versa, can better align your repayments with your risk appetite and financial strategy. Some borrowers opt for a split loan to balance the certainty of fixed rates with the flexibility of variable terms.

Equity release opportunities

If your property value has increased, refinancing may allow you to release equity for renovations or investments. Using equity for home improvements may boost property value, but using it for discretionary spending should be approached cautiously.

Key Considerations Before Making the Switch

Before deciding to refinance, it’s essential to consider the following:

Total cost-benefit analysis

Do the long-term savings outweigh the upfront costs of refinancing? Running a refinancing calculator can help quantify break-even points and potential savings.

Loan terms and flexibility

Will the new loan offer features that align with your financial habits and goals? For example, if you plan to make extra repayments, a loan without exit penalties or with redraw options may suit you better.

Your property’s current value

In areas where property values have softened, a lower valuation could impact your LVR and ability to refinance without paying LMI. This is particularly relevant in regions affected by recent market corrections or supply/demand shifts.

Credit profile

Your credit score and borrowing capacity will influence lender approval. Even minor credit blemishes can affect your ability to access more competitive rates or premium products.

Future interest rate trends

Consider how further RBA cash rate changes might affect your repayments, especially if switching to a variable loan. Some borrowers may prefer fixed or split loans to hedge against future rate increases.

Tips to Improve Your Chances of a Smooth Switch

Taking a proactive approach may help streamline the refinancing process:

Review your credit report early

Ensure your credit file is accurate and address any issues before applying. Mistakes on credit reports are common and could delay approval or lead to less favourable terms.

Lower your credit card limits

Even if you don’t owe much, lenders assess the total limit available to you. Reducing unused credit limits can improve your debt-to-income ratio in the eyes of lenders.

Build a financial buffer

Having savings to cover any upfront fees can ease the transition. A buffer also helps protect you from short-term cash flow disruptions during the settlement period.

Work with a mortgage broker

A broker can present options tailored to your needs and may negotiate better terms with lenders on your behalf. Brokers are particularly valuable if you have non-standard employment or require niche loan products.

Prepare documentation upfront

Having payslips, bank statements, and tax returns ready can speed up loan approval. Streamlining documentation helps avoid delays, especially during busy lending periods or regulatory reviews.

Is Changing Your Home Loan the Right Move?

Refinancing may offer financial advantages, but it won’t suit everyone. Some homeowners may find that sticking with their current lender and negotiating a lower rate could be more practical, especially if switching fees are high or property valuations have decreased. Others may benefit from the flexibility and potential savings of moving to a new lender.

There is no one-size-fits-all answer, and success depends on personal financial goals, market conditions, and lender options available at the time.

Taking the Next Step Toward Smarter Lending

Switching home loans in Australia can be a practical strategy for some borrowers looking to optimise their mortgage and potentially reduce costs. However, it’s important to carefully consider the fees involved, assess your financial position, and explore both your existing lender’s retention offers and competitor products. 

Seeking expert advice from a Melbourne mortgage broker or financial advisor could help guide you through the process and identify opportunities tailored to your individual situation.

Ready to switch and save? Speak to a Melbourne mortgage expert today!

Frequently Asked Questions (FAQs)

1. How much does it typically cost to refinance a home loan in Australia?

Refinancing costs can vary depending on your lender, loan size, and whether you’re switching from a fixed or variable rate loan. Common expenses include discharge fees (around $150–$400), loan application fees (ranging from $200–$700), government charges (such as mortgage registration fees), and potentially Lender’s Mortgage Insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80%. 

Some lenders also offer cashback incentives that could offset some costs. It’s important to weigh these upfront expenses against the potential long-term savings.

2. Can I refinance my mortgage if my property value has dropped?

You might still be able to refinance if your property value has decreased, but it could affect your options. If the lower valuation pushes your LVR above 80%, you may be required to pay LMI again, which can be costly. 

Some lenders may also offer less competitive rates if your LVR is higher. A mortgage broker could help you explore alternative lenders or strategies based on your current equity position.

3. Is it worth refinancing if I’m already on a competitive interest rate?

It depends on your financial goals and the features you need. Even if you already have a good rate, switching could make sense if you want extra options, like an offset account or a split loan.

On the other hand, if your current loan meets your needs and has minimal fees, sticking with your lender and negotiating a rate reduction could also be an option. It’s worth reviewing your loan every couple of years to ensure it still aligns with your circumstances.

4. How long does the refinancing process usually take in Australia?

The process can typically take between two to six weeks, depending on factors such as your lender’s approval timelines, how quickly you provide documentation, and property valuation scheduling. 

Delays can also occur if your financial position has changed since your original loan or if your lender requires additional verification. Working with a mortgage broker may help streamline the process, as they can help manage documentation and lender follow-ups on your behalf.

5. Can refinancing help me consolidate debt, like credit cards or personal loans?

Yes, refinancing to consolidate debt is a common strategy in Australia. Adding things like credit card or personal loan debt into your home loan may lower your interest rate and make repayments simpler.

However, while this could ease cash flow in the short term, it may increase the total interest paid over the life of your home loan if the loan term is extended. It’s important to compare the pros and cons and consider speaking to a broker or financial adviser to see if it fits your situation.