How Do Home Loans, Lenders and Refinancing Work?

How do home loans, lenders and refinancing work?

A home loan lets you borrow against a property and repay the money, plus interest, over a set term. Different types of lender fund and price loans in different ways, and refinancing means moving that loan to a new lender or product, usually for a better rate or structure. The lender must first agree you can afford the new loan, so approval matters as much as the advertised rate.

The rest of this guide explains how lenders decide, what changes the price you pay, and what to compare before you commit.

How do lenders decide how much you can borrow?

Lenders test whether you could keep repaying if rates rose. They take your income, subtract living costs and existing debts, then assess the loan at a rate well above the one you will actually pay. In our coverage, the assessment adds three percentage points to the actual rate, so a borrower at 6.5% is tested at 9.5%.

That is why borrowing capacity can fall when rates rise, even if your income has not changed. For investors, rental income is usually discounted, and existing loans count against you on a second purchase, which is why equity alone does not guarantee approval.

What is the difference between banks, non-banks and brokers?

Banks fund loans mainly from customer deposits. Non-bank lenders do not take deposits. They raise money from wholesale markets and by packaging mortgages into bonds sold to investors, known as securitisation. When that funding is cheap and plentiful, non-banks can compete harder on price and policy.

A mortgage broker compares lenders for you and is typically paid by the lender, not the borrower. Brokers play a large role in the market: our coverage reported they facilitated a record 81.6% of new residential mortgages in the June 2026 quarter. That convenience comes with a commission structure worth understanding, so ask how your broker is paid and which lenders they can access.

How does refinancing work, and when does it make sense?

Refinancing means a new lender pays out your old loan and you start fresh with them. You go through a full application again, including the serviceability test, a property valuation and often a discharge fee from the old lender plus any new-loan costs.

It makes sense when the new rate saves more than the switching costs, or when you need a different structure. Rates differ by lender type. Our coverage showed advertised variable rates from non-banks and regional lenders sat 50 to 80 basis points below the majors in September 2026. Check the comparison rate and the fees, not only the headline number.

What happens if a refinance application is rejected?

A rejection can happen even when your repayments are on time, because the new lender tests you afresh at the buffered rate. A small rise in debt or expenses can tip the result. A broker survey we covered found 49% of brokers had clients unable to switch lenders, up from 25% six months earlier.

There are fallbacks. You can ask your current lender for a retention discount, restructure the loan, or reduce other debts and apply again. Retention offers often sit above the sharpest market rates, so treat them as a fallback rather than a win.

What should you compare between home loans?

Start with the rate, but do not stop there. Compare these features:

Figures are indicative and depend on the rate and fees at the time.

Key terms

  • LVR (loan-to-value ratio): the loan as a percentage of the property’s value. A higher LVR usually means more risk fees and tighter policy.
  • Serviceability: a lender’s test of whether you can afford repayments, including a rate buffer.
  • Offset account: a linked account whose balance reduces the interest charged on your loan.
  • Basis point: one hundredth of a percentage point.
  • Securitisation: bundling loans into bonds sold to investors to fund new lending.
  • Trail commission: ongoing payment a lender makes to a broker while your loan stays active.

What should borrowers watch for from here?

Lender and regulator settings change, but the mechanisms stay the same. Regulators are also looking at how lenders oversee broker channels. Our coverage noted a review of lender oversight of brokers and referrers, which could mean more documentation and longer verification for some borrowers, with investor loans likely to feel it first.

The practical steps do not change. Know your borrowing capacity before you shop, keep your debts and spending records tidy, compare total cost rather than headline rates, and review your loan periodically instead of leaving it on autopilot.

Latest coverage on this topic

Rules, rates and figures change. This guide explains how things work; confirm current settings with the relevant regulator, the ATO or a licensed professional before you act.

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General info, not financial advice.