Refinance Settlement Mistakes and How to Avoid Them

Refinance settlement is the stage where your new lender pays out your old loan and takes over your mortgage. It usually runs in the background, but a few avoidable mistakes can delay it or cost you money.

If you are a teacher planning a refinance around school terms, this matters. You may not have spare time during the day to chase paperwork. Knowing what happens at settlement lets you plan around it.

What Happens at Refinance Settlement?

At settlement, your new lender pays out your old lender, your old mortgage is discharged and your new mortgage is registered on the property title. You then start making repayments on the new loan.

Before that point, your new lender approves the loan and issues loan documents for you to sign. You also complete a discharge authority form, which tells your current lender to release the mortgage. Lenders require this form when you switch to a different lender. Settlement is then booked with both lenders.

Your mortgage broker can usually coordinate this, so you are not chasing two banks yourself.

Mistake One: Cancelling Your Old Loan Too Early

You should not close accounts or stop repayments on your current loan until settlement is confirmed. Until the old loan is paid out, you still owe the money and repayments are still due.

Missing a repayment during the switch can add fees and may count against you with the new lender. Keep paying as normal until your broker or lender confirms settlement is complete. If you also use an offset or redraw account, check what is in it before settlement and plan where that money goes.

Mistake Two: Ignoring Fixed Rate Break Costs

A break fee can apply if you leave a fixed rate loan before the fixed term ends, so check your contract before you set a settlement date. Break fees do not apply to variable rate loans.

If your fixed term is close to ending, timing your refinance for just after expiry may avoid the fee. Our page on fixed rate expiry explains what to look at as the end date nears. Ask your current lender for a written break cost estimate, because the amount depends on your loan and how the lender calculates it.

The trade-off is that waiting can mean paying your current rate for longer, so weigh the break cost against what the delay costs you.

Do Lenders Charge Exit Fees When You Refinance?

Lenders cannot charge an exit fee on residential home loans taken out on or after 1 July 2011 where the loan is secured by residential property. Break fees and discharge fees are different and can still apply.

A discharge fee covers the cost of releasing the mortgage, which can include legal and land registry costs. Moneysmart also lists application fees on the new loan as a cost of switching. If you have less than 20 per cent equity, lenders mortgage insurance may apply on the new loan, which can add to the cost.

Mistake Three: Assuming a Lower Rate Means Lower Cost

A lower rate does not always mean you save money, because fees at settlement can cancel out the savings. You need to compare the savings against the total cost of switching.

As an example, consider a teacher with a loan balance of $500,000 at the illustrative rate of 6.75% p.a. A new lender offers a rate 0.50 percentage points lower, at 6.25% p.a. On a 25 year term, repayments at 6.75% are about $3,455 a month and at 6.25% about $3,298 a month. That is a monthly saving of roughly $157. If switching costs about $1,500 in fees, the saving covers those costs in around ten months. After that, the saving is yours to keep, as long as the lower rate stays in place.

The rates here are illustrative only and your result will depend on your lender, loan size and fees. A broker must consider whether the cost of switching outweighs the benefit before recommending a refinance. You can look at getting a lower interest rate to see what to compare.

If the saving only comes from stretching a longer loan term, you will usually pay more interest over time, so keep your term in mind.

Mistake Four: Adding to Your Loan Without Planning for It

If you borrow extra at refinance, such as to release equity or consolidate debts, the new loan is bigger and your tax and borrowing position can change. Raise this early so it is built into the application, not added at the last minute.

For investment properties, the ATO says interest on any part of a loan used for private purposes is not deductible, so a mixed-purpose loan needs apportioning. Speak to your accountant about how this applies to you. If your loan is an investment loan, our page on investment loan refinancing covers more.

Mistake Five: Refinancing a Government Scheme Loan Without Checking

If your loan is under the Australian Government 5% Deposit Scheme, you may be able to refinance and keep the scheme benefit, but only with another participating lender. Housing Australia states that you cannot increase the loan amount or extend the term. Moving to a lender that is not a participating lender is treated as repaying the loan in full, and the scheme benefit ends.

If the new loan is above 80 per cent of the property value after the scheme cover ends, the lender may charge lenders mortgage insurance or other costs under its own policy. Check this before you sign, not after.

Help to Buy loans have their own rules, including approval from your existing lender and Housing Australia. See our page on the Help to Buy scheme for the basics.

How Long Does Refinance Settlement Take?

Settlement timing varies by lender, and we cannot give a fixed number of days that applies to every loan. It depends on how quickly documents are signed, how quickly your old lender processes the discharge and whether a valuation is needed.

You can speed things up by returning signed documents quickly and keeping your contact details current with both lenders. Teachers who can only take calls at recess or after school should tell their broker the best times, so nothing sits waiting on a reply.

Start with a loan health check to see whether refinancing makes sense for your loan. If you are comparing options, our page on home loans for teachers is a good place to begin.

Call one of our team or book an appointment at a time that works for you. We will check your numbers, explain the costs and handle the settlement paperwork with you.

Frequently Asked Questions