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
• Note: 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

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 to start your exit strategy from expensive private lending.