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

Mortgage recasting, also known as re-amortisation, is when you make a lump sum payment towards your home loan and ask your lender to recalculate your minimum repayments based on the new, lower loan balance. Unlike refinancing, you keep the same lender, interest rate and loan term. The only thing that changes is your required monthly repayment.

While the term mortgage recasting is widely used in the United States, it's not commonly used by Australian lenders. Instead, your bank may refer to it as re-amortising your home loan, recalculating your minimum repayments or restructuring your loan repayments after a lump sum payment.

Mortgage recasting starts with a lump sum payment towards your home loan. Rather than spreading the payment over future repayments, the money immediately reduces your outstanding loan balance.

If your lender offers mortgage recasting, they'll then recalculate your minimum repayments based on the new, lower balance while keeping your existing interest rate and remaining loan term the same. Because you're repaying a smaller loan over the same period, your required monthly repayments will generally be lower.

For example, imagine you have a home loan balance of $550,000 with 25 years remaining at an interest rate of 6.20% p.a. After receiving a $20,000 inheritance, you pay it towards your mortgage, reducing your loan balance to $530,000.

If your lender recalculates your repayments, your minimum monthly repayment could fall from around $3,611 to $3,480, giving you an extra $130 a month in your household budget.

It's important to note that making a lump sum payment doesn't automatically reduce your repayments. Most Australian lenders will continue charging your existing repayment unless you ask them to recalculate it. In that case, you'll generally pay off your home loan sooner instead of reducing your monthly repayments.

If you make extra repayments and leave your minimum repayments unchanged, you'll generally repay your loan sooner and reduce the total interest you pay over time.

With a mortgage recast, your lender recalculates your minimum repayments based on the lower balance. This reduces your required monthly repayments, but your loan is still scheduled to finish at the end of the original loan term.

In other words, making extra repayments focuses on paying off your loan sooner, while mortgage recasting focuses on improving your monthly cash flow. Which option is more suitable depends on whether your priority is becoming debt-free faster or reducing your ongoing household expenses.

While there's no fixed standard, depending on your lender, they can be a small administration fee for recalculating repayments.

Mortgage recasting is generally more common on variable-rate home loans than fixed-rate loans. That's because fixed-rate loans often limit how much you can repay each year without incurring break costs or other fees.

If you're on a fixed rate, check your loan agreement before making a lump sum payment. Many lenders cap additional repayments during the fixed-rate period, and exceeding that limit could trigger penalties. Even if you're allowed to make a lump sum payment, your lender may not offer a repayment recalculation until the fixed rate ends.

If you have a variable-rate home loan, you may have more flexibility to make additional repayments and request a recalculation of your minimum repayments. However, the process and eligibility criteria vary between lenders.

It depends on your lender. Whether your loan is owner-occupied or for an investment property doesn't necessarily determine whether you can recast it. Instead, it comes down to your lender's policies and the features of your home loan. If you're unsure, it's worth checking with your lender before making a lump sum payment.

Whether mortgage recasting is suitable depends on your financial objectives and how you plan to use your lump sum payment. For some borrowers, the priority is lowering their required monthly repayments. For others, it's paying off their home loan sooner, reducing the total interest paid or keeping access to their savings.

Mortgage recasting may be considered by borrowers who have made, or are planning to make, a significant lump sum payment towards their home loan, are satisfied with their current lender and interest rate, and want to reduce their required monthly repayments without refinancing.

Mortgage recasting isn't the only way to use a lump sum payment. Other options include making extra repayments, keeping your savings in an offset account, using a redraw facility or refinancing your home loan. Which approach may be suitable depends on your financial goals, including whether you're looking to reduce your monthly repayments, pay off your loan sooner, lower your interest rate or keep access to your savings.

Mortgage recasting can reduce the overall cost of your home loan, but how much you save depends on factors such as your lump sum payment, remaining loan balance, interest rate and loan term. It's also important to distinguish between lowering your monthly repayments and reducing the total interest paid over the life of the loan.

Yes, if your lender agrees to recalculate your repayments after a lump sum payment, your required monthly repayments will generally be lower because you're repaying a smaller loan balance over the same remaining term.

The amount your repayments fall will depend on your outstanding loan balance, the size of your lump sum payment, your interest rate and the time remaining on your loan.

Making a lump sum payment reduces your outstanding loan balance, which means you'll generally pay less interest over the life of your home loan than if you hadn't made the payment.

However, if you keep your repayments unchanged after making the lump sum payment instead of requesting a mortgage recast, you'll generally repay your loan sooner and save more interest over the life of the loan. That's because you'll continue making higher repayments towards a smaller loan balance.

No. Mortgage recasting doesn't change your interest rate. It simply recalculates your required repayments using your new loan balance while keeping your existing interest rate and remaining loan term the same.

Mortgage recasting reduces your required repayments after you've made a lump sum payment towards your existing loan. Refinancing replaces your current home loan with a new one, allowing you to change your interest rate, loan term, loan features or even your lender.

Borrowers refinance for different reasons, including to:

• Secure a lower interest rate.
• Reduce their monthly repayments by changing the loan term.
• Access home equity for renovations, an investment or another major expense.
• Consolidate debts into their home loan.
• Access home loan features, such as an offset account or redraw facility.
• Move to a lender that better suits their needs.

If your lender offers mortgage recasting, the process generally involves four steps:

1. Check if your loan is eligible. Contact your lender to confirm whether they offer repayment recalculations after a lump sum payment, whether a minimum payment applies and whether any fees are payable.
2. Make a lump sum payment. Pay the agreed amount towards your home loan.
3. Request a repayment recalculation. Ask your lender to recalculate your minimum repayments based on your new loan balance. This may not happen automatically.
4. Confirm your new repayments. Check when your updated minimum repayments take effect and review your next loan statement to ensure the changes have been applied.