Should you refinance your home loan or switch lenders? - NAB

What is refinancing?

Refinancing is the process of taking out a new mortgage to replace an existing loan. The goal is usually to get a better interest rate, change loan features or borrow more money using the equity in your home.

There are two ways to refinance:

Stay with your current lender: You move to a different loan product but stay with the same bank. 

Switch to a new lender: You take out a new home loan with a different lender and pay off your existing one. 

Both are forms of refinancing, but switching involves more paperwork, set up fees and time.

Reasons to refinance or switch home loans

You may consider refinancing if your circumstances change, your fixed rate is ending or your current home loan no longer meets your needs. Common reasons include:

When to refinance with your current lender

  • Your lender can offer you a lower rate or reduced repayments.
  • You can move to a loan with features that better suit your needs.
  • You want to top up your loan to renovate or invest.
  • You’d prefer to avoid the costs and paperwork involved with switching lenders.

When to switch your home loan to a new lender

  • The expected savings outweigh the costs of switching.
  • Another lender offers a more competitive rate, lower fees or better features.
  • Your current lender is unwilling to negotiate.
  • You’re unhappy with the service you’ve received.

Pros and cons of refinancing

Benefits

  • You may get a more competitive interest rate, to help reduce your repayments and save you money over time.

  • You might switch to a loan that offers access to different features and add-ons such as redraw facilities or offset accounts.

  • Refinancing can let you tap into the equity in your home to borrow for renovating, buying an investment property, buying a new car or taking a holiday.

  • If you’ve got other debts like a personal loan, car loan or credit card into your mortgage, you can roll them into your mortgage to manage everything in one place.

  • With a lower rate or a longer loan term, your monthly repayments could be lower, easing your cash flow.
     

Disadvantages

  • If you’re leaving a fixed rate loan early, your current lender might charge you a hefty fee, also known as economic cost.

  • The new lender will likely charge you set-up fees like application, valuation or settlement fees to get things started.

  • Switching a home loan usually takes a few weeks. Comparing options can take a few days to a couple of weeks, followed by 2-4 weeks for approval and 1-2 weeks to settle and switch the loan. Timeframes can vary between lenders and depend on your circumstances and how quickly documents are provided.

  • Applying for a new loan means a credit check, which could slightly alter your credit score.

  • If your financial situation has changed (like lower income or higher debts), your switch might not be approved.

Costs of refinancing

It’s important to look at the costs involved in refinancing and make sure that the costs don’t outweigh the benefits. Make sure you look at your home loan repayments, including any potential fees. Apart from the costs to close and open a new loan, there may be other ongoing fees, such as:

  • monthly account fees
  • fees on features like offset accounts or redraw facilities
  • late payment fees
  • switching fees
  • break costs if your fixed rate period has not yet expired.

If you’re looking to switch your mortgage to NAB, our team of experts are here to support you on your journey.

Example: Comparing costs and savings

One way to compare the costs and potential benefits of refinancing is to estimate how long it may take to recover the upfront costs.

For example, let’s say:

  • Refinancing costs (application, valuation, settlement and other fees): $1,200
  • Estimated monthly repayment savings after refinancing: $100 per month

The formula

Refinancing costs divided by Monthly savings equals Months to recover the costs

Calculation

$1,200 ÷ $100 = 12 months

In this example, it would take around 12 months for the lower repayments to offset the upfront refinancing costs. If you keep the loan for longer than that, you may continue to benefit from the repayment savings.

Questions for your lender before refinancing your home loan

It’s always a good idea to contact your lender before refinancing and ask them to review your home loan, especially if your circumstances have changed or if your fixed interest rate period is about to end. If they can meet your needs with a better interest rate, you might decide not to refinance and avoid the application process and associated fees.

Some questions you might ask your lender include:

  • What type of home loan do you have and should you consider alternatives such as fixed rate, variable interest rate or a split loan?
  • What’s your current interest rate?
  • What is your loan term?
  • Are your mortgage repayments monthly, fortnightly, or weekly?
  • Are you paying principal and interest, or interest only repayments?
  • What features are available?
  • Are there features you’re not using that could help you pay off your mortgage faster or reduce repayments?
  • How much equity do you have in your property?
  • Are you looking for a loan increase for renovating or investing in property?

You can also use the refinance calculator to compare your existing home loan with a NAB home loan and estimate potential savings and repayments.

Frequently asked questions

  • The documents you need can vary depending on your circumstances and lender requirements.

    Commonly requested documents may include:

    • proof of identity
    • recent payslips or proof of income
    • information about your current home loan
    • details of your assets, savings and debts
    • recent bank statements.

    Your lender will let you know which documents are required for your application.

    Talk to an expert

  • If you refinance your home loan, any offset account or redraw facility linked to your existing loan may be closed as part of the process.

    Before refinancing, check:

    • whether your new loan offers an offset account, redraw facility or both
    • any fees that may apply to these features
    • how your funds will be transferred or accessed during the switch.

    Loan features can vary between lenders and home loan products, so it's important to understand what's included before changing loans.

  • Yes, refinancing may still be possible if you have less than 20% equity in your property. However, additional costs may apply.

    For example, if you have less than 20% equity, you may need to pay lenders mortgage insurance (LMI). LMI protects the lender, not the borrower, and can add to the overall cost of refinancing.

    Lenders will also consider factors such as your income, expenses, credit history and ability to meet repayments when assessing your application.

Alternatives to refinancing your home loan

It’s always best to first negotiate better terms with your current lender before considering refinancing.

Selling your current home and buying a new one doesn’t necessarily mean you need to refinance. In most cases, you can keep your existing loan by changing the property held against the mortgage. You may even be able to apply for a loan increase in some circumstances. With a fixed rate loan, you can keep your existing loan and avoid break costs and other fees that may apply when you switch mortgages.

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Other life moments

Guide to refinancing your home loan

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The cost of refinancing your home loan

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Important information

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.