Mortgage recasting in Australia: What is it and how it works?

A mortgage recast (or home loan recast) is when you make a large lump sum payment toward your loan's principal, and your lender then recalculates your repayments based on the new, lower balance. The result is a lower required monthly repayment for the remainder of your loan term.

What doesn't change: your interest rate, your lender, and the end date of your loan. What does change: how much you're required to pay each month.

It's worth knowing that if you make a lump sum payment on a variable rate home loan in Australia without specifically asking for a recalculation, most banks will keep your repayments at the same level by default. This means you'd pay the loan off faster, but your monthly payment won't drop. To actually lower your repayments through recasting, you need to contact your lender and request the recalculation, as it doesn't happen automatically.

Here's a hypothetical scenario that explains how recasting works.

After a change in working hours, a family with a $550,000 variable rate home loan at 6.2% and 25 years remaining wanted to reduce their monthly commitments without refinancing.

Using a $20,000 inheritance, they made a lump sum payment and asked their lender to recalculate their repayments. Their monthly payment dropped from $3,611 to $3,480, a saving of around $130 a month, while their rate and loan term stayed exactly the same.

In short, they were able to reduce their monthly repayments and free up some space in their budget by making a lump sum payment towards the loan and asking the lender to recalculate their payments.

No, "mortgage recasting" or “debt recasting” are not standard products or terms at most Australian banks, such as CommBank, Westpac, ANZ, or NAB. However, you can still use this option. But, in Australia, you’ll need to say something different to your lender, such as:

• "Recalculate my minimum monthly repayments" after a lump sum payment, or
• "Re-amortise my loan" based on the new, lower balance

Most lenders will accommodate this on a variable rate home loan, though some may charge a small administration fee. It's worth calling before you make the payment to confirm the process and any requirements. Some lenders have a minimum lump sum amount (often around $10,000) before they'll agree to recalculate.

Here are four steps to recast your mortgage in Australia:

1. Contact your lender first. Before transferring any money, call your bank and ask: "If I make a large lump sum payment, can I have my minimum monthly repayments recalculated?" Confirm whether they offer this, any fees involved, and the minimum payment amount required.
2. Make the lump sum payment. Once confirmed, transfer the funds to your home loan account.
3. Formally request the recalculation. After your payment clears, contact your lender again to formally request the re-amortisation. This is the step most people miss, it won't happen without you asking.
4. Check your next statement. Confirm that your new, lower minimum repayment has been applied correctly.

Recasting a mortgage and refinancing are two different things. A mortgage recast keeps your existing loan in place and simply adjusts your repayments after a lump sum payment. Refinancing replaces your current loan with an entirely new one, usually with a new rate, new term, and often a new lender.

Recasting your mortgage can make sense when you're happy with your current interest rate and want to reduce monthly repayments without the cost and hassle of refinancing. If your main goal is to secure a lower rate, refinancing could be an option worth considering.

For an home owner with a lump sum, this is the most important decision. Recasting permanently lowers your principal but offers no flexibility. Offset and redraw facilities reduce your interest bill while keeping your money accessible.

While it’s great to use any additional money to chip away at your home loan, if you think you have a major expense coming up, parking your savings in an offset account or using a redraw facility can give you some flexibility, provided your loan offers these features.

If you’re taking out a new home loan, remember that flexibility is good but it doesn’t come for free. Lenders often charge higher interest rates or fees for the bells and whistles, so it's worth considering whether you need these extras before signing up.

While recasting your mortgage can be a helpful strategy, it's may not suit everybody.

• Lower monthly repayments: The main reason to do it. A lower minimum payment frees up cash each month for other expenses, savings or investments.
• No new loan application: You avoid the credit checks, paperwork, waiting periods and fees that come with refinancing.
• You keep your current rate: If you locked in a competitive rate you don't want to risk losing in a higher-rate environment, recasting lets you reduce repayments without touching your rate.
• Low cost: Most lenders charge little to nothing for a repayment recalculation, compared to the thousands refinancing can cost.
• No impact on your credit file: Because it's not a new application, there's no credit check and your credit score is unaffected.Some potential drawbacks of mortgage recasting

• You lose access to the money: Once you pay down the principal, it's gone into your loan. Unlike an offset account, you can't access it later if your circumstances change. Don't commit funds you might need.
• It doesn't lower your interest rate: If your rate is the problem, recasting won't solve it. Refinancing to a better rate would be more effective.
• Not all lenders offer it: Most variable rate home loans allow repayment recalculation on request, but not all lenders do. Fixed rate loans may not permit lump sum payments without break costs. Always confirm with your lender first.
• There may be a fee: Some lenders charge a small admin fee for the re-amortisation.