Refinance
Refinancing Checklist: What to Work Through Before You Switch Home Loans
Use this refinancing checklist before you switch home loans: compare switching costs, check your equity and LMI, weigh features, and run the numbers first.
A refinancing checklist is the short list of things to check before you move your home loan to a new lender or a new product, so you can see whether switching is likely to leave you better off. Refinancing means replacing your current home loan with another one, usually to chase a lower rate, lower fees, or features that suit you better. This refinancing checklist walks through the steps before refinancing in plain order, from talking to your current lender to comparing the real cost, so you can weigh up the decision with your eyes open.
This is general information only. What suits you will depend on your circumstances and each lender’s criteria.
The work below is drawn from the Australian Securities and Investments Commission’s MoneySmart service, the government’s independent money guidance. Whether switching makes sense depends on your numbers, so treat this refinance checklist as a way to gather the facts, not as advice that switching is right for you.
If you are weighing up a switch, the rate, costs and lender decisions come together on our refinance home loans hub.
Start with your current lender
The first item on the refinancing checklist is the one most people skip. MoneySmart suggests telling your current lender you are planning to switch to a cheaper loan offered by a different lender. Your existing lender may offer to match or better the deal to keep your business, which can save you the cost and effort of moving at all. It costs nothing to ask, and it gives you a benchmark to measure any new offer against.
If your lender will not move, you have lost nothing and you have a clearer picture of what you are comparing.
Add up the cost of switching
This is the heart of any refinance checklist. MoneySmart is direct about it: compare all the fees and charges before you decide, because the cost of switching can outweigh the savings. A lower rate does not help if the costs of getting there eat the gain.
The switching costs MoneySmart names include:
- A break fee, which can apply on a fixed rate loan if you exit before the fixed term ends.
- A discharge fee, also called a termination fee, charged by your current lender to close the loan.
- An application fee charged by the new lender to set up the loan.
- A switching fee.
- Stamp duty, which can apply in some situations.
- Lenders mortgage insurance, which is covered below.
These figures vary by lender and by loan, so the checklist item is to get each one in writing rather than to assume a dollar amount. Once you have them, you can test the trade off properly.
Check whether lenders mortgage insurance applies
Lenders mortgage insurance, often shortened to LMI, is a cost that can catch people out when they refinance. MoneySmart points out that LMI may apply when switching if you have less than 20% equity in your home. Equity is the share of the property you actually own, that is, its value less what you still owe.
If your equity has grown since you first borrowed, you may sit above the 20% mark and avoid this cost. If it has not, a new lender may require LMI again, even though you paid it the first time. That makes the equity check an early item on any steps before refinancing, because it can change the maths significantly.
If you want the detail on how this insurance works, our guide to what lenders mortgage insurance is explains who it protects and how it is calculated, and how to avoid LMI covers the ways borrowers reduce or sidestep it.
Compare the loans on the comparison rate, not the headline
When you line up offers, compare them on the same basis. MoneySmart describes a comparison rate as a single figure of the cost of the loan that includes the interest rate and most fees. It exists so a low advertised rate cannot hide a loan that is expensive once the fees are added in.
MoneySmart lists the factors to compare when choosing a home loan: the interest rate per year, the comparison rate per year, the monthly repayment, the application fee, ongoing fees, the loan term, and loan features such as offset accounts, redraw facilities or lines of credit. Run each candidate loan through the same set of factors and the better deal usually becomes clear.
Our comparison rate explained guide goes deeper on why the comparison rate sits above the headline rate and what it does and does not capture.
Weigh the features you will actually use
A cheaper rate is not the only reason to refinance, and a slightly higher rate with the right features can be the better fit. Two features come up most often.
| Offset account | Redraw facility | |
|---|---|---|
| What it is | A transaction account linked to your home loan, generally available with a variable rate home loan. | A facility that lets you access extra repayments you have already made on your loan. |
| How it helps | The balance in it reduces the amount of your loan that is charged interest. | It gives you back the extra repayments you have made if you need them. |
| Access to your money | Money in the account stays available like a normal transaction account. | Withdrawal access depends on the loan terms and the lender's policy. |
MoneySmart gives the example that with a 500,000 dollar home loan and 20,000 dollars in the offset account, interest is charged only on 480,000 dollars.
The checklist question is simple: which features would you genuinely use, and is any extra cost for them worth it for how you manage money.
Mind the loan term
One quiet trap sits on this list.
MoneySmart warns that the longer you have a loan, the more you will pay in interest, so it suggests negotiating a new loan with a similar length to your current one. Refinancing often resets the clock back to a fresh 25 or 30 year term, and stretching the term back out can raise the total interest you pay even when the rate drops. Ask the new lender to match the remaining term on your current loan, or keep your repayments at their current level so you do not quietly extend the loan.
Run the numbers before you commit
The final item before you decide is to test the trade off with real figures. MoneySmart suggests using the mortgage switching calculator to work out whether changing home loans could save you money. It helps you work out whether switching could save money, how long it might take to recover the cost of switching, and the benefit of making higher repayments instead of minimum repayments. MoneySmart notes the results are only estimates.
A quick rate check is a useful companion to that. It shows whether the rate you are paying now, or the rate on offer, looks competitive once you read it alongside the comparison rate.
Try the rate check
You can use a rate check to see whether your current rate, or a proposed new rate, still looks competitive before you go to the effort of switching.
Try the rate check calculator
Open the calculator to run your own numbers.
It also helps to see what those rates turn into each month, which our guide to home loan repayments walks through.
A quick refinancing checklist
Pulling it together, here is the order to work through:
Where Finance Lab fits in
A refinancing checklist gets the facts on the table. Reading those facts against your income, your equity, your goals, and a panel of lenders is where it gets personal, and that is where guidance helps. The team at Finance Lab can talk you through how the rate, the fees, the features, and the loan term come together for your circumstances, and which lender criteria you may need to meet.
Want this applied to your situation?
A Finance Lab broker can talk you through your income, deposit and goals, with no cost to chat and no obligation to proceed.