Scenario: refinancing out of a private first mortgage

This page looks at a hypothetical self-employed consultant who used a private loan as a stepping stone and now wants to move to a longer-term lender. The consultant and every lender mentioned are invented. The steps reflect how refinancing generally works, and the linked Privet tools let you test your own situation.

Why the private loan was taken out

The hypothetical consultant found an investment property at a good price but needed to settle quickly. Their business had grown strongly, yet their recent tax returns had not been lodged, so mainstream lenders could not assess their income. A private first mortgage filled the gap: it was assessed mainly on the property and a clear plan to refinance, and it settled in time.

The loan has a short term, interest is paid monthly, and the letter of offer describes the expected exit as a refinance once the tax returns are lodged. The returns are now done, and the consultant wants to move to a lender that offers a longer term and, they hope, a lower ongoing cost.

What the new lender looks for

A longer-term lender takes a different view from the private lender. Where the private lender leaned on the security and exit, the new lender usually looks closely at the borrower's capacity to service the debt over many years.

Typical areas of assessment include:

• Income. Lodged tax returns and notices of assessment, business financial statements and sometimes activity statements. If full documents are still thin, some non-bank lenders offer alt-doc loans that accept other evidence, usually with tighter limits.
• The reason for the private loan. The lender will ask why it was needed and whether that reason has been resolved. A clear, documented explanation helps.
• Conduct on the private loan. Statements showing repayments made on time support the application. Arrears or extensions invite questions.
• Credit history. Credit enquiries, other debts and any defaults.
• The property. A valuation from the new lender's panel, which may differ from the figure the private lender used.
• Living expenses and other commitments, particularly for any loan that will be regulated.

The documents lenders ask for lesson gives a fuller list.

Choosing the shape of the new loan

The consultant will need to decide between principal and interest and interest-only repayments, and over what term. The repayments calculator shows how the regular payment changes with each choice. Entering the expected balance, the rate from an offer and different terms makes the cash flow effect clear. Interest-only payments are lower at first, but the balance does not reduce, and the lender may assess serviceability as though principal is being repaid.

Where the consultant also has business debts or other property loans, the new lender may consider them together. If the new loan can only cover part of the private balance, the remaining gap must be funded another way before the discharge can proceed.

The cost of leaving the private loan

Discharging a private mortgage is rarely just a matter of repaying the balance. Items to check include:

• A discharge or administration fee charged by the private lender.
• An exit fee, if the contract has one.
• A minimum interest period, under which interest for a set portion of the term is payable even if the loan is repaid early.
• Whether any prepaid interest is refunded for the unused period.
• The private lender's legal costs to prepare the discharge.
• Government registration fees for removing the old mortgage and registering the new one, which vary by state.

On the new loan, add establishment, valuation and legal fees, and possibly lenders mortgage insurance. The loan cost estimator helps total these from written quotes.

Getting the timing right

Timing is where refinances most often go wrong. The new lender needs time to assess the application, value the property and issue documents. The private lender needs a written request for a payout figure and, often, signed discharge authority. Both sides must then book a settlement date.

The consultant opens the exit timeline planner and enters the private loan's expiry date along with their own estimates for each stage: application, valuation, formal offer, document signing and settlement. The planner shows the latest date to start each step. Adding a buffer for a slow valuation or a request for more documents is sensible, because a refinance that settles after expiry may trigger extension fees or default interest.

Is the new lender regulated, and does it matter?

Consumer credit law generally covers loans to individuals for buying residential investment property, and refinances of such loans, while loans to companies or for business purposes generally fall outside it. Where the loan is regulated, the lender must make reasonable inquiries about the borrower's finances and assess whether the loan is not unsuitable before offering it, and the borrower has access to hardship arrangements and external dispute resolution through AFCA. Business-purpose lending generally sits outside those rules. Ask the incoming lender how it classifies the loan, and confirm its credit licence using the how to check a lender guide.

What can go wrong

• The valuation is lower. The new loan may fall short of the payout figure, leaving a gap.
• Income is assessed lower than expected. Lenders may exclude some income or apply their own adjustments.
• The private loan expires first. An extension may be possible, but it is at the private lender's discretion and usually comes at a cost.
• Unexpected discharge charges. A minimum interest clause can reduce the benefit of refinancing early.

If the refinance cannot be achieved, the backup exits are often an extension, a different lender or a sale. The exit strategies lesson discusses how borrowers plan for this.

Questions to ask both lenders

1. What is the exact payout figure and which fees are included?
2. Is there a minimum interest period, exit fee or notice requirement?
3. How long will the new lender's assessment and valuation take?
4. What evidence of income and loan conduct will the new lender need?
5. If settlement is delayed, what does the private lender charge, and will it consider a short extension?

This scenario is general information only and not financial or legal advice.