There are hundreds of motivating factors that can spur Australian property owners to consider refinancing their home loan. Chief among them is likely the potential of realising a lower interest rate. A lower rate could save a borrower thousands of dollars of interest every year, and hundreds of thousands over the life of their loan.
According to the Australian Bureau of Statistics (ABS), $238 billion worth of home loans were refinanced over the 12 months to August 2023. That’s perhaps unsurprising given the cash rate hiking spree the Reserve Bank of Australia embarked upon in mid-2022. An Aussie with a $500,000 home loan and a 7% p.a. interest rate could save more than $300 a month, or around $118,000 over a 30 year mortgage, by refinancing to a home loan with a 6% p.a. interest rate, Savings.com.au’s Refinancing Calculator shows.
But refinancing doesn't just happen – it typically requires some leg work on a homeowner’s behalf. How much a borrower might save will depend on the size of their mortgage, how many years are left on their loan term, and how much lower their new interest rate is, among other factors. On the other hand, refinancing is rarely free. Any potential savings should be considered in comparison to the cost of refinancing to determine whether refinancing would actually be beneficial.
Refinancing costs can vary depending on lenders and the individual situations of borrowers. Generally, there are two main types of home loan refinance:
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External refinance: When you move your loan to another lender
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Internal refinance: When you refinance your home loan with your existing lender
A homeowner looking to refinance through their existing lender might be able to bypass exit fees, valuation fees, and application fees. However, they might find the interest rates offered by their current lender are notably higher than those advertised by a competing bank. On other side of the coin, many lenders want to secure borrowers' business and might wave some fees or offer discounted interest rates to get it.
Costs of refinancing a home loan
There are plenty of fees that lenders and banks can (and often do) tack onto the home loan refinancing process. Most of the individual costs, how much they are, and whether they’re charged at all will depend on the lender. Some lenders may waive application fees but charge higher ongoing fees, for instance.
Hint: Paying attention to the comparison rate can be an easy way to factor in many ongoing fees and charges when choosing a new loan. A loan with high fees is likely to have a comparison rate that’s significantly higher than the advertised rate.
When contemplating the cost of refinancing it’s important to calculate the cumulative potential expense of doing so, instead of comparing the individual fees charged by different lenders. Some of the typical upfront refinancing fees you might come across are explained below, along with high-level indicative costs.
1. Mortgage application fee
If you’re looking to refinance externally (that is, with a different lender) you may need to pay an application fee, also known as an establishment or upfront fee. This is a one-off payment taken to set up the new home loan and will cover the administration costs incurred by the lender. Sometimes, a lender will include any costs associated with valuing a borrower’s property in their application fee.
2. Property valuation fee
Depending on how much equity you have in your property, a new lender may ask to value your asset before giving you the tick of approval to refinance. How much a valuation fee can end up costing varies between lenders, properties, and locations. For example, it tends to cost more to get rural properties valued compared to those in urban areas, usually because getting a valuer out to rural areas often demands greater planning and travel time than if they were to zip over to a nearby city suburb.
Valuations can cost as little as $50 or more than $1,000, but they generally sit somewhere between $200 and $600. Meanwhile, there are plenty of lenders that don't charge a valuation fee or simply tie it into their application fee.
3. Discharge fee for termination of mortgage
A mortgage discharge fee, also known as a termination fee, is generally applicable to an external refinance and charged by your existing lender. Your lender might require you to pay a discharge fee to cover the administrative costs it incurs when ending a loan contract.
While discharge fees can add up to $1,000 or more, they typically sit at around $200 to $400.
4. Break cost
If you currently have a fixed-rate home loan and you want to refinance before the end of your fixed term, you’ll probably have to pay a break fee. These cover any potential losses your current lender might face due to your agreement ending before it was scheduled to.
But what losses might they bear? Well, that depends on what’s going on behind the scenes. You might assume that when you take out a fixed-rate home loan, your bank simply pulls the money from the deposit accounts of its savers to hand over to you. But that’s not always the case. Often, a bank or lender will borrow the money they lend you on the money market for wholesale interest rates, which will likely be lower than the rate they charge you. If you pull out of your fixed-rate agreement early, the bank or lender will still have to pay interest on the money it initially loaned to you. Therein lies the origin of break costs.
Break costs can be somewhat complicated to calculate as they depend on how much a bank or lender is out of pocket by. They generally differ based on the loan amount, the fixed rate compared to the current variable market rate, and the length of time remaining on the fixed term. It can easily cost thousands of dollars to break a mortgage (Savings.com.au even reported on a $35,000 break fee in 2020), so it's probably worth contacting your lender to work out how much you might be up for if you were to refinance.
5. Settlement fee
Settlement fees are paid to a lender to settle a new loan. They cover the costs of a lender’s legal representation who will attend the loan settlement with you and your conveyancer or solicitor.
The cost to settle is commonly between $100 and $400, but can be as much as $800 or more.
6. Mortgage registration fees
A mortgage registration fee is charged by state and territory governments for mortgages to be added to a register, thereby preventing you from selling the property without paying back the lender. Registration fees vary between states and territories but are generally around $150 to $250.
7. Exit fees
Following government reforms, lenders have been banned from charging early exit fees on loans taken out after 1 July 2011. However, loans taken out before this date may still incur exit fees, which can be up to $7,000. You'll need to check the terms of your existing loan to find out if an exit fee applies to you.
8. Time and effort
Time is money, and it takes time to compare home loans and fully assess the terms and conditions between different products. Refinancing can take anywhere from a few days to multiple weeks, depending on hundreds of factors.
Whether you believe it's worthwhile to sink many of your precious hours filling out paperwork, organising appointments, and waiting for valuations will depend on how much you value your time. Though, home loan pre-approval could save you from headaches.
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
Lender Home Loan Interest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees Max LVR Lump Sum Repayment Additional Repayments Split Loan Option Tags Features Link Compare Promoted Product Disclosure
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Contemplating the number and magnitude of refinancing costs outlined above might be daunting, but it’s important that they’re considered within the context of the potential long-term savings generated by refinancing your home loan to a lower interest rate. Depending on your circumstances, you might recoup these costs in just a few monthly repayments.
Ensure you are thorough in working out which refinancing costs apply to you, asking both your existing lender and your possible new lender what they might charge you. That way, you can more effectively complete a cost-benefit analysis when contemplating refinancing.
Originally published by Dominic Beattie, last updated by Brooke Cooper on 16 October 2023.
First published on March 2022
Image by Pixabay via Pexels.
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