What is refinancing? How does it work?


When it comes to loan repayments, try not to get complacent. Whether you’re repaying a 30-year mortgage or a variable rate personal loan, chances are you could save by refinancing. 

Many borrowers refinance their existing loans when they find an offer with a lower interest rate or lower monthly fees. So, you’ll likely feel the benefit of refinancing if your current home or other loan is sky-high. 

Loan refinancing is a pretty simple concept, but there are several factors you must understand. Our guide to refinancing and the refinancing process will tell you all you need to know. 

Let’s get to the most common frequently asked questions:

  • What is refinancing?  
  • What types of loans can be refinanced? 
  • Is refinancing a loan a good idea?
  • What are the fees associated with refinancing a mortgage?
  • How does refinancing work?
  • Can I get a lower interest rate without refinancing?

Q1: What is refinancing? 

Refinancing is the process of replacing an existing loan with a new one that generally offers a better rate. You use the new loan to pay off the original so that subsequent monthly repayments are lower. 

There are lots of different reasons to refinance. In some cases, people decide to refinance when current interest rates drop. In doing so, they can apply for new loans with low fixed rates. 

In others, people refinance to consolidate debt and get lower rates in that way. Other reasons include wanting to cut down on fees or deciding to switch lenders. 

Either way, refinancing is a good idea if you want to free up more money for your savings account. 

Q2: What types of loans can be refinanced? 

You can refinance just about any loan type, and this includes, but is not limited to, the following:

Q3: Is refinancing a loan a good idea? 

Refinancing is often a great idea, but it depends on your current financial situation. For one thing, if you have bad credit, you’ll have little borrowing power. 

Market rates also play a role. You might want to change your loans, but if the available loan rates are similar to what you already have, there’s not much point. 

However, refinancing is worth considering if you have an excellent personal finance history and find a low rate loan. You see, refinancing is a good way of saving money, and it can help you lighten the load of your monthly outgoings. 

Say you regularly pay business insurance, car insurance, and home insurance. You’ll have one less expense to worry about with a new, more manageable loan.

Note: If you’re considering refinancing, check if loan rates have dropped using loan calculators. They’ll show you the best offers from reputable lenders with an Australian credit licence, including break costs. 

Is refinancing your mortgage a good idea?

Homeowners might be wondering about refinancing a home loan specifically. As above, it’s a good idea if you have the means to refinance, including good credit history. 

Further, the real estate market needs to work in your favour if your goal is lowering your monthly payments. In other words, to find a better adjustable-rate mortgage or fixed-rate mortgage than your current mortgage, there need to be lower rates available. 

Q4: What are the fees associated with refinancing a mortgage? 

If you’re interested in refinancing your mortgage and comparing home loans, you must look at more than just the comparison rates. As when you first took out a mortgage, a closing cost will apply. 

So, on top of your monthly mortgage payment at today’s mortgage rates, you may also have to pay: 

  • A new application fee.
  • An appraisal fee.
  • Lender and attorney fees. 
  • Title search fees. 
  • Mortgage insurance. 

The charges will vary depending on the conditions set by mortgage brokers (including online brokers). However, under no circumstances will you have to pay stamp duty again. 

Important: Similar advice applies to all other types of refinancing. So, any refinanced loan could come with additional costs. 

Do you pay LMI when refinancing? 

You may have to pay lenders mortgage insurance (LMI) to mortgage lenders when you refinance your home loan. Thankfully, this one-off charge will not affect your monthly payments. 

LMI protects lenders if a borrower defaults on their scheduled repayments. You generally only have to pay if you borrow more than 80% of the property value. 

Generally speaking, the lender will designate the insurance companies and find the insurance quotes. You have to foot the bill. As such, ensure you estimate the cost and factor it in when you use a mortgage calculator. 

Q5: Will refinancing affect my credit? 

Refinancing mortgage loans or other loans can affect your credit in several ways. For one thing, the more loans you apply for, the more credit inquiries will appear on your credit history, which can lower your credit score and might look bad to a loans lender. 

Plus, when you refinance a loan, you effectively close the account of an existing loan, and this, too, can lower your score. 

However, the money you’ll save thanks to refinancing will likely counteract any harmful credit activity. Saving money through refinancing is a good thing because it will improve your financial situation, and in turn, you'll get better deals.

Note: Some lenders want you to have improved your credit before applying to refinance. But you can get loans for bad credit, too. When you’re refinancing your home loan or your business credit cards, you’ll find the best offers for you using refinance calculators. You can check your credit score for free here.

Q6: How does refinancing work? 

It's pretty easy to refinance your mortgage or another loan. As long as you understand the refinance process, finding a deal to replace your current loan shouldn't be too hard. 

All you have to do is use a repayment calculator to find the best offers from lenders with a credit licence. These could include loans with a longer loan term or a lower overall loan repayment than your current lender can offer. 

The same applies if you’re looking for debt consolidation loans. These consolidation loans should be enough to pay off your existing debts. 

Once you’ve found the best deal, put in a loan application. As long as you receive approval, you’ll receive your money reasonably soon after. 

Note: Remember that the refinance rates will depend on your credit scoring, whether for standard refinancing or debt consolidation. So, aim to keep your score as high as possible before you apply. 

Q7: Can I get a lower interest rate without refinancing? 

Loan and mortgage refinancing isn’t for everyone. If you don’t want to refinance your home loan or another loan, there are ways to keep interest rates down. In turn, the loan amounts you pay each month will reduce. 

Since interest rates are at a record low in Australia, chances are your lender is offering better rates to newer customers. So, call up and see if you can negotiate a new deal. You may have to do some credit repair work beforehand. 

If your lender is amenable, you could end up with better loan or mortgage rates without having to refinance. Unfortunately, though, this is never guaranteed.

In summary

Many home buyers with an overpriced mortgage payment and other borrowers could benefit from loan refinancing. It’s a great way to access up-to-date loans rates from competitive third party lenders. 

If you’re unsure if it’s time to refinance, compare your current loan with other offers. While your existing lender might have been the most attractive option at the time, that may no longer be the case. 

So, do your homework to find the best deals on the market right now. It’s easy if you use the WeMoney website or app.

We also offer tips and tricks on everything from online banking to, you guessed it, mortgage refinances. To put it another way, we’re the perfect one-stop-shop for financial wellness. 

Wait! We’d love to hear your thoughts

If you enjoy using our app, please take a moment to rate it in the App Store. Your feedback in the past has tremendously helped us at WeMoney to improve the app to help it be the best that it can be. A massive thanks to each one of you for making that happen!

Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation. 

Turn your learnings into practice
Try WeMoney today.