Refinance a private first mortgage: when to switch lenders mid-loan

Most people assume a private loan has to run its course. It doesn’t. A private first mortgage can usually be refinanced at any point in its term: the new lender pays out the old one at settlement, the old mortgage is discharged, and the new one is registered in first position in the same transaction.

Owners make the switch for practical reasons. Monthly repayments are eating cash flow. The current lender won’t lend a cent more. A fixed term carries fees for leaving early. There’s a first mortgage with one lender and a caveat with another, and two exits to manage. This page covers when a mid-term refinance makes sense, what to check before you commit, and how the switch runs. If your loan is about to expire and time is short, read paying out an expiring private loan too.

Why do owners refinance a private first mortgage mid-term?

The reasons fall into a handful of groups:

Reason	What’s usually happening	What a new first mortgage changes
Repayments straining cash flow	Monthly interest is due from day one	Interest capitalised for the first 6 months, so no repayments in that period
Need more funds	Current lender won’t increase the loan	One new loan pays out the old one and adds the new money
Fixed term with early exit costs	The plan changed and the loan doesn’t fit	Open terms, with no penalty for repaying early
Two or more private loans	First mortgage plus a caveat or second mortgage	One loan, one lender, one exit
A difficult or slow lender	Extensions and variations take weeks	A lender that works to your exit
Default interest being charged	A missed payment or a breach	The old debt is cleared and the clock reset

A mid-term refinance has one big advantage over a last-minute one: you have time. You can read the contract, get the payout statement, plan the exit and settle when it suits you rather than when the old lender’s deadline forces you.

What should you check in your current loan contract?

Before you commit, read your current loan agreement and Letter of Offer, or ask your solicitor to. Look for:

• Early repayment fees or a minimum interest period, which some private loans include.
• How prepaid interest is treated if you repay early: refunded, partly refunded or kept.
• Discharge fees and the lender’s legal costs on payout.
• Notice requirements. Some contracts ask for written notice before repayment.
• Default interest provisions, and whether any have been triggered.

None of these usually stops a refinance, but they change the sums. The new loan has to cover the full payout, so knowing the real number early avoids a shortfall on settlement day. Our page on prepaid or capitalised interest explains how each interest structure behaves when a loan ends early.

Why does the payout statement matter so much?

Because it’s the number the whole settlement is built on. A payout statement from a private lender typically shows the principal, interest accrued to the payout date, unpaid fees, any early repayment charge, default interest if it applies, and discharge and legal costs.

Ask for it in writing as soon as you decide to switch, with a clear date it’s valid to and a daily figure for any extra days. If settlement moves, you’ll need an updated one. A vague verbal figure is how refinances fall short at the last minute.

How does the switch run on settlement day?

The mechanics are the same as any refinance, and they run through electronic settlement:

1. You enquire, and a specialist confirms the property, the payout and your exit.
2. Indicative terms are issued, then the Letter of Offer once documents are in.
3. The current lender provides its written payout statement and prepares its discharge.
4. Your solicitor explains the new documents and you sign.
5. At settlement, the old lender is paid in full, its mortgage is discharged, and the new first mortgage is registered.

The discharge has to be signed by the outgoing lender. Western Australia’s land registry is blunt about it: “All mortgagees must join in and sign a discharge.” In Queensland, the lender signs a release of mortgage, which must be registered for the mortgage to come off the title. In Victoria, once a discharge is registered, the mortgage reference is removed from the title. Our discharge of mortgage glossary entry covers the term itself.

If you have a caveat loan as well, it’s withdrawn at the same settlement, so the title ends up showing only the new first mortgage.

Illustrative example: replacing monthly payments with breathing room

A Perth fit-out company’s director took a private first mortgage of $600k over his investment unit twelve months ago, on a fixed term with monthly interest payments, to fund a large commercial job. The job is finished, but the client is paying slowly, and the monthly payments are now draining the business. He also needs $120k for materials on a new contract.

Illustrative: the unit is assessed at around $1.1m. His current lender’s payout statement shows $612k including accrued interest and a discharge fee. A new first mortgage of $750k pays out the old loan, provides the $120k and covers costs. Interest is capitalised for the first 6 months, so the business has no repayments while the slow-paying client settles. The open term means he can repay the moment that payment lands, with no penalty. Figures are illustrative only.

If your current loan is working against you, check your loan in about a minute.

When does a refinance not make sense?

Be honest about the arithmetic. A refinance may not be worth it when:

• The exit is weeks away. If the sale or refinance that clears the loan is about to land, the costs of switching may outweigh the gain.
• Early repayment costs are high and the benefit of the new structure is small.
• The underlying problem is the exit itself. A new lender doesn’t fix a sale that won’t happen or a bank that won’t refinance. Rebuild the exit first; our exit strategy red flags guide helps.
• A bank will now lend. If your situation has recovered enough for a bank, go there instead; that was always the plan. Our guide on private lender vs bank shows what a bank will want to see.

If your current lender is simply asking for an extension fee, compare it with the cost of switching. Our guide to loan term extensions sets out what to weigh.

Stuck with a private loan that no longer fits? See if you qualify

Private loans are meant to make life easier while you get to your exit. If yours has turned into a monthly drain, a ceiling on what you can borrow, or a contract you can’t get out of, a switch may put things right.

The loan check takes about 60 seconds, and there’s no credit check when you enquire. Your enquiry comes to us alone; it isn’t shopped around to a crowd of lenders who all call at once. A specialist reads your situation, including the current loan, and calls you to talk through whether a refinance stacks up. Tell us accurately what you owe and what your current contract says, so the numbers we give you are right first time.

Compare your current loan with a fresh start →