What is refinancing?

You apply for a new loan, with your current lender or a new one. If it is approved, the new lender pays out the old loan at settlement, the old mortgage is discharged and your repayments move to the new loan. Refixing or negotiating with your current lender can be quicker and may avoid discharge fees, while switching lenders often gives access to better rates or features but adds valuation and settlement steps.

It is not only home loans. A car loan, chattel mortgage or equipment contract can be refinanced too, usually to lower the repayment or to clear a balloon falling due. The lender reassesses your finances and the asset's age and value, then pays out the old contract.

The typical path is: compare offers; ask your current lender for a written break cost and discharge figure; apply with ID, income documents and loan statements; the lender orders a valuation and checks serviceability during underwriting; then settlement and discharge. A mortgage broker can compare lenders and handle the paperwork.

Look past the headline rate. The comparison rate folds in common fees and is a useful guide, but also check upfront application, valuation and establishment fees, ongoing account or package fees, and the exit, discharge and break costs on your current loan. Consider whether the new loan-to-value ratio triggers lenders' mortgage insurance, whether a fixed or variable structure suits you, the repayment type (principal and interest or interest-only) and any balloon or residual payments.

Put a dollar value on features you will actually use, such as an offset account or flexible redraw; a cheaper rate without an offset can cost more overall. Over a hold period, total cost equals repayments plus upfront fees, break or exit fees and ongoing fees. Ask for an itemised cost comparison and an exact break cost in writing, and check whether a promotional rate reverts to a higher standard rate later.

Refinancing early in a fixed term, with years still to run, can backfire, because break costs are largest then and can erase the savings. Breaking close to the end of a fixed period is usually the cheaper case. It also may not stack up if the expected savings over the time you plan to hold the loan do not exceed the exit and establishment fees, or if your plans are uncertain and you may not keep the new loan long enough to recoup the costs.

Low equity is another catch: a refinance that increases your loan-to-value ratio may trigger lenders' mortgage insurance or require a guarantor. Before switching, it is worth asking your current lender for a retention offer. Common mistakes include comparing headline rates only, ignoring break costs, underestimating valuation and settlement delays, and overlooking the value of features such as an offset account.

If you refinance an investment property, interest on funds used for income-producing purposes is generally tax deductible, but deductibility depends on how the borrowed money is used. Keep clear records showing the purpose of any funds you draw, especially with a cash-out refinance. If lenders' mortgage insurance or other costs are capitalised into the loan, check their tax treatment with the ATO, and speak with your accountant or a tax professional about your situation.