# How to Refinance from Private Lender to Bank: Complete Exit Strategy Guide
Private lending is often a short-term solution. Here's how to successfully refinance to a bank and dramatically reduce your interest costs.
## Why Refinance from Private to Bank?
**The Cost Difference:**
**Private Lender:**
- Rates: 9-18% p.a. (or 24-48% p.a. for caveat loans)
- Fees: 2-3% establishment, higher ongoing fees
- Example: $500,000 @ 12% = $60,000/year interest
**Bank:**
- Rates: 5.5-7.5% p.a.
- Fees: Lower establishment, minimal ongoing
- Example: $500,000 @ 6.5% = $32,500/year interest
- **Annual saving**: $27,500
**Over 5 years**: Saving $137,500!
## When to Refinance
**Ideal Timing:**
**6-12 months** after private loan for most borrowers
**Why wait at least 6 months?**
1. Build payment history on private loan
2. Improve credit score (pay bills on time)
3. Allow credit inquiries to age
4. Stabilize income/employment if that was an issue
5. Complete property improvements if relevant
**Why not wait too long?**
- Paying unnecessary high interest
- Risk of property value changes
- Risk of income changes
**Refinance Triggers:**
- Credit score improved to 650+
- Defaults paid off
- Employment stabilized (6+ months)
- Property value increased (renovations complete)
- Business income now provable (tax returns available)
## Bank Requirements for Approval
To refinance from private to bank, you'll need to meet standard bank criteria:
### 1. Credit Score
**Minimum**: Usually 650+ (Equifax)
**Ideal**: 700+
**Improving Your Score:**
- Pay all bills on time for 6-12 months
- Pay off defaults
- Reduce credit card balances
- Avoid new credit applications
### 2. Serviceability (Can You Afford Repayments?)
**Banks assess:**
- Your income (must be verifiable)
- Your expenses (HEM or actual)
- Other debts
**Calculation Example:**
- Income: $120,000 p.a.
- Less tax: ~$90,000 net
- Less living expenses: ~$35,000 (HEM)
- Less other debts: $12,000/year
- Available: $43,000/year = ~$3,600/month
- **Can borrow**: ~$500,000 @ 6.5% (P&I over 30 years = $3,160/month)
### 3. Equity / LVR
**Banks lend up to:**
- Owner-occupied: 80% LVR (or 95% with LMI)
- Investment: 80% LVR (90% with LMI)
- Refinance: Typically 80% LVR max
**Example:**
- Property value: $700,000
- Existing private loan: $450,000
- Current LVR: 64%
- ✅ Well within 80% - good to refinance
**If LVR too high**: May need to pay down loan or wait for value growth
### 4. Employment/Income Stability
**Employed:**
- 3-6 months in current role (permanent)
- If probation: May need to finish probation
- Payslips and tax returns
**Self-Employed:**
- 2 years tax returns (some lenders accept 1 year)
- ABN registered 2+ years
- Current financials (P&L, BAS)
### 5. Property Valuation
Bank will order valuation. Property must value at or above expected amount.
**Tips:**
- Ensure property well-presented
- Complete renovations before applying
- Provide recent comparable sales
### 6. Purpose/Use of Funds
**Acceptable purposes for refinance:**
- Refinance existing debt ✅
- Debt consolidation ✅
- Cash out for home improvements ✅
- Cash out for investment property deposit ✅
**Sometimes problematic:**
- Cash out for business (may require business loan)
- Cash out for speculation
## Step-by-Step Refinance Process
### Step 1: Assess Your Position (Week 1)
**Check Your Credit Score:**
- Get free report from Equifax, Experian, Illion
- Review for errors
- Note score and defaults
**Calculate Your Equity:**
- Estimate property value
- Subtract existing loan
- Calculate LVR
**Review Income:**
- Gather payslips, tax returns
- Ensure income provable
**Identify Issues:**
- What prevented bank approval initially?
- Has it been resolved?
### Step 2: Improve Your Profile (Weeks 2-26)
**If you need to improve before applying:**
**Credit Repair (3-12 months):**
- Pay off small defaults (<$1,000)
- Get "paid in full" letters
- Dispute errors on credit file
- Pay all bills on time
- Reduce credit card limits
**Income Stabilization (3-6 months):**
- Stay in current job
- Build employment tenure
- If self-employed: complete tax return
**Property Value (1-6 months):**
- Complete renovations
- Improve presentation
- Get comparable sales evidence
### Step 3: Engage Broker (Week 1-2)
**Why use a broker:**
- Access to 30+ lenders
- Know which banks suit your profile
- Handle application process
- Negotiate better rates
- Free service (lender pays them)
**Find refinance specialist broker:**
- Experienced with refinance from private
- Understands credit impaired scenarios
- Can access second-tier banks if needed
### Step 4: Formal Application (Week 1-2)
**Documents Needed:**
- ID (license, passport)
- Proof of income (payslips, tax returns)
- Current loan statements (private loan)
- Property ownership evidence
- Credit score report (optional, lender will pull anyway)
- Bank statements (3-6 months)
**Broker submits to lender:**
- Loan application form
- Supporting documents
- Credit check authorization
### Step 5: Valuation (Week 2-3)
**Bank orders valuation:**
- Independent valuer inspects property
- Compares to recent sales
- Provides valuation report to bank
**Cost**: $200-$600 (you pay, even if declined)
**Tip**: Ensure property clean, tidy, well-presented on inspection day.
### Step 6: Assessment & Approval (Week 3-5)
**Bank assesses:**
- Credit check (automated)
- Income verification
- Valuation review
- Serviceability calculations
- Compliance checks
**Possible Outcomes:**
- ✅ **Approved**: Formal approval letter issued
- ⚠️ **Conditional approval**: Need additional docs or explanation
- ❌ **Declined**: Reason provided, can address and reapply
**Timeline:**
- Major banks: 5-10 business days
- Second-tier lenders: 10-15 business days
- Complex scenarios: Up to 4 weeks
### Step 7: Formal Approval & Loan Docs (Week 5-6)
**Approval issued:**
- Review loan terms (rate, fees, LVR)
- Accept approval
- Loan documents prepared
**Solicitor/conveyancer:**
- Review mortgage documents
- Explain terms
- Arrange signing
### Step 8: Settlement (Week 7-8)
**Settlement process:**
- New bank pays out private lender
- Private lender releases mortgage
- New bank registers mortgage
- You start making repayments to bank
**Cost**: Private lender may charge exit fees (check original contract)
**Total Timeline**: 6-8 weeks from application to settlement (plus any credit repair time beforehand)
## Cost of Refinancing
**Upfront Costs:**
- Valuation: $200-$600
- Application fee (new bank): $0-$1,000
- Legal/conveyancing: $800-$1,500
- Discharge fee (private lender): $300-$800
- Mortgage registration: $150-$300
- **Total**: $1,500-$4,000
**Exit Fees from Private Lender:**
- Check your loan contract
- Some charge 1-2% early exit fee
- Some have no exit fees
- Example: 1% of $500,000 = $5,000
**Total Refinance Cost**: $1,500-$9,000
**Break-even:**
If saving $27,500/year in interest, even $9,000 in refinance costs paid back in 4 months!
## What If You Get Declined?
**Common Decline Reasons:**
### 1. Credit Score Still Too Low
**Solution:**
- Wait 3-6 more months, keep paying on time
- Pay off remaining defaults
- Reduce credit card limits
- Dispute errors on credit file
- Try second-tier lenders (Pepper, Liberty, etc.)
### 2. Insufficient Income Proof
**Solution:**
- Wait for next tax return if self-employed
- Provide additional income evidence (contracts, bank statements)
- Add a co-borrower with provable income
- Try low-doc lender (higher rates, but better than private)
### 3. Property Valued Below Expected
**Solution:**
- Get second valuation (some lenders allow)
- Provide comparable sales evidence
- Pay down loan to improve LVR
- Wait 6-12 months for market appreciation
### 4. Debt-to-Income Ratio Too High
**Solution:**
- Pay down other debts (credit cards, personal loans)
- Increase income (second job, pay rise)
- Extend loan term (reduces monthly repayments)
- Borrow less (pay down private loan first)
### 5. Employment Too New
**Solution:**
- Wait until off probation
- Provide job offer letter confirming permanency
- Use previous employment if in same industry
## Alternative Refinance Options
If major banks decline, consider:
### Second-Tier Lenders
**Who**: Pepper Money, Liberty, Firstmac, La Trobe
**Rates**: 7-10% p.a. (still cheaper than private 9-18%)
**Benefits**: More flexible credit, income, employment
**Downsides**: Higher rates than major banks
### Non-Bank Lenders
**Who**: Regional lenders, credit unions
**Rates**: 6.5-9% p.a.
**Benefits**: Personal service, flexible
**Downsides**: Smaller loan limits
### "Specialist" Private Lenders
**Who**: Private lenders with lower rates for established loans
**Rates**: 7-12% p.a. (better than your current 12-18%)
**Benefits**: No credit score requirement
**Downside**: Still higher than banks
**Strategy**: Refinance to second-tier lender now (save money), then refinance to major bank in 12 months.
## Preparing for a Successful Refinance
**6 Months Before Applying:**
**Month 1-2:**
- Pull credit report
- Identify defaults to pay off
- Start credit repair
**Month 3-4:**
- Pay off small defaults
- Ensure all bills paid on time
- Reduce credit card balances to <30% limit
**Month 4-5:**
- Complete property improvements
- Gather income documents
- Build savings buffer
**Month 5-6:**
- Engage broker
- Get property pre-valued (informal)
- Review loan market rates
**Month 6:**
- Apply for bank finance
- Strong position, high approval chance
## Real Refinance Examples
**Example 1: John - Caveat Loan to Bank**
**Starting Position:**
- Caveat loan: $200,000 @ 3% per month (36% p.a.)
- Monthly interest: $6,000
- Credit: 2 defaults ($1,500 total), score 580
- Property: $600,000 (LVR 33%)
**Action Plan:**
- Month 1: Paid off both defaults ($1,500)
- Month 1-6: Paid caveat loan interest on time
- Month 6: Credit score improved to 680
**Refinance:**
- Applied to CBA via broker
- Approved in 3 weeks
- New loan: $200,000 @ 6.2% p.a.
- Monthly interest: $1,033
**Result:**
- Monthly saving: $4,967
- Annual saving: $59,600
- Refinance cost: $3,000
- **Break-even**: 2 weeks!
**Example 2: Sarah - Private Loan to Second-Tier**
**Starting Position:**
- Private loan: $450,000 @ 11% p.a.
- Annual interest: $49,500
- Credit: Discharged bankruptcy 18 months ago
- Property: $700,000 (LVR 64%)
- Self-employed
**Issue:**
- Major banks declined due to bankruptcy
**Solution:**
- Applied to Pepper Money (second-tier lender)
- Provided 2 years tax returns
- Approved: $450,000 @ 8.2% p.a.
- Annual interest: $36,900
**Result:**
- Annual saving: $12,600
- Refinance cost: $4,500
- Still paying more than major bank, but significant saving
- Plan: Refinance to major bank after 2 years (3+ years post-bankruptcy)
## Mistakes to Avoid When Refinancing
**1. Applying Too Soon**
Wait until position genuinely improved. Multiple declines hurt credit score.
**2. Not Using a Broker**
Brokers have inside knowledge of which lenders suit your profile. Don't guess.
**3. Overstating Income**
Banks verify everything. Overstating leads to decline and potential fraud issues.
**4. Forgetting Exit Fees**
Check private loan contract for early exit fees before applying.
**5. Poor Property Presentation**
Valuation is critical. Ensure property shows well.
**6. Taking Cash Out Too Early**
First refinance: just swap debt. After established with bank 12 months, then access equity.
## Your Refinance Checklist
**Before Applying:**
- ✅ Credit score 650+ (or close to it)
- ✅ Defaults paid off or aged 3+ years
- ✅ 6+ months payment history on current loan
- ✅ Provable income (payslips, tax returns)
- ✅ LVR below 80%
- ✅ Property well-maintained
- ✅ All bills paid on time recently
**Documents Ready:**
- ✅ ID (license + passport or Medicare)
- ✅ Payslips (3 months) or tax returns (2 years)
- ✅ Bank statements (3-6 months)
- ✅ Current loan statements
- ✅ Rates notice or title deed
**Next Steps:**
1. Check credit score now
2. Identify gaps vs bank requirements
3. Create improvement timeline
4. Engage broker when ready
5. Apply to bank
6. **[Connect with refinance specialists](/connect)**
## Frequently Asked Questions
**How long after a default can I refinance to a bank?**
Paid defaults: 12-24 months. Unpaid: 24-36 months. Some second-tier lenders accept sooner.
**Will refinancing hurt my credit score?**
Slightly - the application creates an inquiry. But long-term benefit of lower repayments and on-time payments improves score.
**Can I refinance with the same private lender to a better rate?**
Sometimes. Ask your private lender if they have lower rates for established clients. But usually bank is still cheaper.
**What if my property value has dropped?**
If now over 80% LVR, banks may decline. Options: Pay down loan to reduce LVR, wait for value recovery, or use LMI.
**Do I need to tell my current lender I'm refinancing?**
Not until new bank settles and pays them out. Then they're notified automatically.
**How much can I save by refinancing?**
Average: $10,000-$30,000 per year depending on loan size and rate difference.
Refinancing from private to bank lending is one of the most impactful financial moves you can make - often saving tens of thousands per year.
**Ready to refinance?** [Connect with bank and second-tier lenders now](/connect) to start your exit strategy from expensive private lending.