How to Refinance Your First Home Loan: A Step-by-Step Guide

Most first home buyers who borrow with a small deposit are told the same thing at settlement: pay lenders mortgage insurance (LMI) now, and the loan is yours. Few are told what happens three or five years later Refinancing Low Deposit Home Loan in Australia, when a competitor advertises a rate half a percent lower and the switch looks obvious. That is the moment many borrowers discover that refinancing low deposit home loan is not the same as refinancing loan with a comfortable amount of equity behind it.

The reason is simple. LMI is generally non-transferable, so a new lender can ask you to pay it again if your loan is still above 80% of the property’s current value. A cheaper rate can disappear into a five-figure premium when refinancing low deposit home loan. The good news is that you can often plan around it. If you are weighing up your wider home loan options in Australia, this guide shows how to work out where you stand and what to do next.

We cover how lenders measure your equity when refinancing low deposit home loan, how the First Home Guarantee and guarantor loans change the rules, ways to get under the 80% line before you apply, the full cost of switching, and a step-by-step process. It is general information only and does not replace advice on your own circumstances.

Quick answer: Refinancing low deposit home loan works best once your loan is at or below 80% of the property’s current valuation, because most lenders then charge no LMI. If you are still above 80%, either wait, pay the loan down, or compare the saving from a lower rate against a new LMI premium. If your loan uses the First Home Guarantee, you can generally move only to another participating lender without losing the guarantee.

Why refinancing low deposit home loan is different

Refinancing means ending your current loan and replacing it with a new one, either with the same lender or a different one. The new lender pays out the old loan at settlement, and you start repaying the new one. MoneySmart, the ASIC-run consumer site, describes the basics in its guide to switching home loans.

With a large deposit, that process is mostly about rates and fees. Refinancing low deposit home loan adds a second question: does the new lender see you as a borrower with at least 20% equity? That is the line most lenders use to decide whether LMI applies, and the answer can change the whole decision.

Three features make the low deposit case special:

• The test uses today’s value, not your purchase price. A new lender orders a valuation, and your loan-to-value ratio (LVR) is calculated against that figure.
• Your original LMI does not follow you. LMI protects the lender, not you, and it is generally non-refundable and non-transferable. Some insurers allow a partial refund if a loan is repaid in full within the first few years, so it is worth asking.
• Some schemes attach to the lender. The First Home Guarantee and guarantor arrangements come with conditions that affect where and when you can switch.

APRA, the prudential regulator, has noted that some borrowers have been unable to refinance because of changes in their personal circumstances and high loan-to-value ratios, among other reasons. In other words, a high LVR is one of the most common blockers, and the sooner you measure it, the more options you have.

Step 1: Work out your real LVR before refinancing low deposit home loan

Your LVR is your loan balance divided by your property’s current value, expressed as a percentage. If you owe $540,000 and the property is valued at $620,000, your LVR is 87.1%. That is above 80%, so a new lender would probably ask for LMI unless something changes.

Do this calculation before you speak to any lender. You will need three numbers:

• Your current balance. Use the figure on your latest statement, not the original loan amount.
• A realistic valuation. Check recent sales of similar homes nearby, then compare with an online estimate. The lender’s own valuation is what counts, and it can come in lower than an estimate.
• Any other debt secured against the property, such as a top-up or a second loan.

Lenders generally treat 80% as the threshold, although a small number require LMI from a lower point, such as 85%. Policies differ, so ask each lender what its cut-off is.

Step 2: Identify your loan structure before refinancing low deposit home loan

The right strategy depends on how you got into the loan. There are four common structures, and each behaves differently when refinancing a low deposit home loan.

If you used the First Home Guarantee

Under the Australian Government 5% Deposit Scheme, Housing Australia guarantees part of your loan to a participating lender, which is why you pay no LMI on a 5% deposit. The scheme information guide published by CommBank under the 5% Deposit Scheme explains the rules for refinancing low deposit home loan under the scheme. If your loan is supported by the scheme, you may be able to refinance with another participating lender and keep the benefit. If you move to a lender that is not participating, the loan loses the benefit, and the new lender may require LMI.

Lender guides describe the guarantee as ending once scheduled repayments bring the loan down to about 80% of the original property value. For example, on an $800,000 purchase with a 5% deposit, the loan starts at $760,000. The guarantee would fall away when scheduled repayments take the balance to $640,000, meaning $120,000 of principal repaid. Some guides say this typically takes eight to ten years. Extra repayments sitting in redraw or an offset account are generally not counted. Check the current scheme rules and your lender’s conditions before you act, because they can change.

If you used a guarantor

A guarantor loan lets a family member, usually a parent, offer equity in their own property as extra security. That reduces your effective LVR and avoids LMI. It also exposes the guarantor to risk, so most families want to remove the guarantee as soon as possible.

Refinancing low deposit home loan is the usual way to do it. Once your own loan sits at or below 80% of your property’s value, a new lender can take your property as sole security and release the guarantor. That makes reaching 80% a double win: lower cost for you, and freedom for your parents.

If LMI was capitalised into your loan

Many borrowers add the LMI premium to the loan balance. That feels painless at settlement, but it means you are paying interest on the premium for years, and your LVR starts higher than the purchase LVR. It also means that when you refinance, you may need to clear the 80% line on the capitalised balance, not just the original loan amount.

Step 3: Get below 80% before refinancing low deposit home loan

If your LVR is just above 80%, small moves can make a large difference. Because LMI can cost thousands of dollars, with some estimates putting it at roughly 1% to 5% of the loan depending on LVR, getting under the line is often the single best saving available. Four approaches are worth considering.

Pay down the balance. Calculate how much principal you must clear to hit 80%. In the example above, 80% of $620,000 is $496,000, so you would need to reduce a $540,000 balance by $44,000. A lump sum from savings, a bonus or a family gift can close that gap.

Wait for repayments and growth to do the work. Every scheduled repayment reduces your balance, and rising property values reduce your LVR without any effort. In the same example, the home would need to be worth about $675,000 for $540,000 to equal 80%, an increase of roughly 8.9%. Growth is never guaranteed, so treat it as a bonus rather than a plan.

Ask for a fresh valuation, and make it count. A recent valuation can show your equity position more accurately than an online estimate. If you have renovated, keep invoices and photographs and give them to the valuer. Our guide on how to rebuild equity before you refinance covers this in more detail for borrowers whose equity is thin.

Check lender-specific policies. Some lenders offer LMI waivers for selected professions, and cut-offs vary. Do not assume your current lender’s policy is typical.

One caution: an offset account balance reduces the interest you pay, but it generally does not change the loan balance used for the LVR calculation. If your goal is to cross the 80% line, you may need to apply the cash to the loan itself.

When refinancing low deposit home loan is worth paying LMI again

Sometimes you cannot reach 80% soon, and the existing rate is clearly uncompetitive. In that case, compare the cost of switching with the saving it produces.

Suppose you owe $500,000 and a new lender offers a rate 0.60 percentage points lower. The annual interest saving is about $3,000 in the first year. If a new LMI premium is $8,000 and other switching costs are $800, the total cost is $8,800. At that pace it would take almost three years to break even, and the saving shrinks as your balance falls. If the LMI is capitalised, you also pay interest on it. These numbers are illustrative only, but the method is general: divide the total cost by the annual saving, then ask whether you will keep the loan long enough to benefit.

The full cost of refinancing low deposit home loan

LMI is the largest potential cost, but not the only one. Exit fees on new variable loans were banned from 1 July 2011, yet several charges remain. Before you decide, add up everything on both sides of the switch.

If you want the detail on each item, our fee-by-fee guide to refinancing charges explains what to ask lenders to waive. One more trap to watch: some lenders will refinance only onto a new 25 or 30 year term. MoneySmart suggests negotiating a term close to what remains on your current loan. Otherwise a lower repayment may simply mean paying interest for longer.

Will you be approved for refinancing low deposit home loan?

Even with plenty of equity, a new lender will assess you afresh. Refinancing low deposit home loan means passing the same tests as a new application, and three of them matter most.

The serviceability buffer. APRA confirmed on 28 May 2026 that the mortgage serviceability buffer remains at 3 percentage points. Lenders must test whether you could meet repayments at a rate at least 3 points above the loan rate. If your rate is 6%, you are assessed as if it were 9%. That test can be tighter than the one you passed when you first borrowed, especially if your expenses or other debts have grown.

Your credit file. The new lender will check your credit report. Missed payments, new credit cards and buy-now-pay-later accounts can all affect the outcome. Check your own report for free before you apply.

Your income and debts. Changes in employment, a new baby or a larger car loan can reduce borrowing capacity. Consider paying down small debts before applying, since limits on credit cards count even when the balance is zero.

Step-by-step: refinancing low deposit home loan

Here is the process we follow with clients, in the order that avoids surprises.

1. Collect your documents. Gather your latest loan statement, recent payslips, proof of other debts and identification.
2. Calculate your LVR. Use your current balance and a realistic valuation.
3. Identify your loan structure. Confirm whether you have LMI, the First Home Guarantee, a guarantor or a waiver, and read the conditions.
4. Ask your current lender for a retention offer. Request its best rate for existing customers. Sometimes a lender will match a competitor to keep your business.
5. Compare lenders on total cost. Look at the rate, fees, features, LMI position and any cashback conditions, not just the headline rate.
6. Run the break-even calculation. Divide total switching costs by annual savings.
7. Apply and wait for valuation. The new lender assesses your application and orders a valuation. Respond quickly to any request for extra documents.
8. The new lender pays out the old loan. Check that automatic payments and offset links move across, and keep your first statement.

Allow several weeks, as timing varies by lender and by how quickly you supply documents.

Worked examples of refinancing low deposit home loan

The figures below are made up to show how the rules work. Your own numbers will differ.

Example 1: already below 80%. Priya bought at $700,000 with a 10% deposit and borrowed $630,000. Five years on, her balance is $585,000 and the home is valued at $780,000. Her LVR is 75%, so a new lender should not require LMI. She can compare lenders purely on rate and fees.

Example 2: just above 80%. Tom owes $540,000 on a home valued at $620,000, an LVR of 87.1%. To reach 80%, he needs to pay down $44,000. He decides to wait six months and make a lump-sum payment from his savings, then restart the process of refinancing low deposit home loan with a fresh valuation.

Example 3: First Home Guarantee. Mei bought an $800,000 home with a 5% deposit under the scheme. Her loan is still well above 80% of the original value. Refinancing to a non-participating lender would end the guarantee and could trigger LMI, so her broker searches for a better rate among participating lenders only.

Mistakes to avoid when refinancing a low deposit home loan

Most costly errors in refinancing low deposit home loan come from skipping the groundwork:

• Chasing the lowest advertised rate without checking whether LMI will be charged again.
• Using the purchase price instead of the current valuation to estimate LVR.
• Refinancing out of a First Home Guarantee loan to a non-participating lender without checking the consequences.
• Forgetting break costs on a fixed rate or the conditions on a cashback.
• Accepting a longer loan term without checking the total interest.
• Assuming an offset balance lowers your LVR.

Frequently asked questions

Can refinancing low deposit home loan avoid paying LMI again?

Yes, if your loan is at or below 80% of the property’s current value when the new lender assesses it. Some lenders also have waivers for certain professions, and a First Home Guarantee loan may be moved to another participating lender without LMI. If your LVR is still above 80%, expect the new lender to ask for LMI.

How long should I wait before refinancing low deposit home loan?

There is no fixed waiting period for refinancing low deposit home loan. What matters is your equity, your repayment record and any early-exit conditions such as cashback clawbacks. Many borrowers start looking once their LVR approaches 80%, but a broker can assess your position sooner.

Is LMI refundable or transferable when refinancing low deposit home loan?

Generally not. LMI is usually a one-off, non-refundable and non-transferable premium. Some insurers allow a partial refund if the loan is repaid in full within a short period, so ask your current lender before you start.

Does refinancing First Home Guarantee loan end the guarantee?

Not necessarily. You may be able to refinance with another participating lender and keep the guarantee. If you move to a lender that does not participate, the guarantee ends and the new lender may require LMI if your LVR is above 80%.

Can a mortgage broker help with refinancing low deposit home loan?

Yes. A broker can compare lenders’ LMI policies, check scheme participation, estimate your serviceability and run the break-even numbers. That saves you from approaching lenders one by one and leaving unnecessary enquiries on your credit file.

Conclusion: measure your equity before you chase a rate

The decision on refinancing low deposit home loan should rest on three numbers: your current LVR, the total cost of moving and the annual saving. Refinancing low deposit home loan can be a smart move once you are under 80%, or when the saving clearly outweighs a new premium. It can be an expensive mistake when you switch first and discover the LMI bill afterwards. Measure your equity, understand your loan structure and compare on total cost.

If you would like a second pair of eyes, Efficient Capital can help. Our team compares options across a panel of lenders, checks your LVR and scheme position, and manages the application from start to settlement. Call us, request an appointment through our website, or ask for a home loan health check, and start by exploring your options for refinancing low deposit home loan with Efficient Capital.