What refinancing a home loan actually changes

What refinancing means

A refinance is a new credit contract. The new lender (or the same lender on new terms) pays out the old loan. The old mortgage is discharged and a new mortgage is registered against the title. Discharge and registration fees are government or registry charges. They are separate from the lender’s discharge, application or valuation fees.

ASIC MoneySmart explains switching home loans, including that a lower advertised rate does not automatically mean a lower cost once fees and a longer term are counted.

Why people refinance

Common reasons include a better rate, moving from interest-only to principal-and-interest, consolidating a split, accessing equity for another purpose, or leaving a loan that no longer matches how the property is used. None of those reasons is a recommendation. Each has a cost and a credit assessment attached.

Loan balance, rate and remaining term

The amount refinanced is usually the current loan balance, plus any fees added to the new loan. The interest rate on the new loan is a new contract rate. The remaining term can be reset. Extending a 22-year remaining term back to 30 years can reduce the repayment and increase total interest over the life of the loan. That term-reset effect is easy to miss if you only compare the new repayment with the old one.

The repayment calculator can show how a different rate or term changes repayment arithmetic. It cannot tell you whether a refinance would be approved or cheaper after fees.

Fees and switching costs

Costs can include: the current lender’s discharge fee, break costs on a fixed rate, a new lender’s application or valuation fee, mortgage registration, and mortgage discharge registration. Break costs on a fixed rate can be material. They are calculated by the lender under the contract, not by this website.

Equity and LVR on a refinance

Equity is the difference between the lender’s valuation and what is still owed. A refinance LVR uses the new loan against that valuation. If values have risen, the LVR may be lower than when you first borrowed. If you add debt, the LVR may rise. LMI can apply again on a high-LVR refinance. Valuation is the lender’s figure, not a real-estate listing price.

What does not change automatically

Refinancing does not change stamp duty on the original purchase. It does not reset first-home eligibility. It can change whether the loan is treated as owner-occupied or investment if the purpose has changed. That is a fact the new lender will test. Offset and redraw features depend on the new product, not on what the old loan allowed.