Refinancing a home loan can be a simple process, but there are usually upfront costs involved. So is it worth it?
One of the most common motivations among Aussie homeowners for refinancing – moving from one existing mortgage to another – is to access a lower interest rate, especially in today’s competitive home loan market.
This isn’t surprising, given that a lower rate could save you thousands in interest repayments every year. However, refinancing does require some effort to be put in on your own behalf. The level of savings generated through refinancing depends (amongst other things) on the size of your mortgage, how many years left on the loan term and how much lower the new interest rate is compared to your current rate.
This needs to be considered alongside the initial costs of refinancing to help you determine whether it’s worth it. These upfront costs to refinance a mortgage can vary depending on the lender and the type of refinancing.
Generally, there are two main types of home loan refinance:
- External refinance: When you move your loan to another financial lender
- Internal refinance: When you refinance your home loan with your existing lender
Refinancing with your existing lender, for instance, might save you some of the additional fees associated with changing lenders, such as exit, valuation and application fees.
Low rate refinance home loans
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 18 May 2020. View disclaimer.
Upfront costs of refinancing a mortgage
There are a variety of fees that can add to the upfront costs of refinancing a home loan. The costs of these different fees and indeed whether they are even charged at all will depend on the lender. When assessing the cost of refinancing, it’s important to calculate the total cost of changing as opposed to comparing individual fees between different lenders. For example, some lenders may waive application fees, but charge higher ongoing fees instead.
Some of the typical upfront refinancing fees you might come across are explained below, along with high-level indicative costs.
1. Application fee
If you’re refinancing externally with another lender, you may be required to pay an application fee. Also known as an ‘establishment’ fee, this is a one-off payment to set up the refinanced home loan and cover the administration costs. Some lenders may include the costs of valuation in their application fee.
Cost range: Up to $1,000
2. Valuation fee
Depending on the level of equity you have in your property, a new lender may require a valuation to be done before deciding to let you refinance with them. The cost of the valuation fee often depends on the lender and the location of the property. For example, valuation fees tend to be higher for rural properties compared to those in more urban areas (usually due to simple practicalities including additional travel time required to get to the property).
Cost range: Up to $600
3. Discharge fee
Also known as a ‘termination’ fee, mortgage discharge fees are applicable to an external refinance, where your existing lender may require you to pay discharge fees to cover the administrative costs required to end the loan contract.
Cost range: Anywhere from $200 up to $1,000
4. Break fee
If you currently have a fixed rate home loan and you want to refinance before the end of the fixed term, you’ll have to pay break fees. These fees cover any potential losses your current lender might face due to the ‘economic cost’ of that agreement not running to its originally slated term.
Break costs can be somewhat complicated to calculate, but they generally depend on the loan amount, the fixed rate compared to the current variable market rate and the length of time remaining on the fixed term. Typically, break fees will be higher if interest rates have gone down since the start of the fixed term.
Cost range: Depends on the situation, but can be many thousands of dollars (always get a definitive answer from your lender).
5. Settlement fee
Settlement fees are paid to a new lender to settle the new loan. They are typically used to cover the costs of arranging for a legal representative of the lender to attend the loan settlement with you and your conveyancer or solicitor.
Cost range: Anywhere from $100 to $600
6. Mortgage registration fees
A mortgage registration fee is charged by the State Government for the mortgage to be added to a register to prevent you from selling the property without paying back the lender.
Cost range: $100-$180 (Varies by State and Territory)
7. Exit fees
Following government reforms, lenders have been banned from charging early exit fees on loans taken out after 1 July 2011. However, lenders may still charge exit fees on loans taken out before this date.
Cost range: $0-$7,000 (Check the terms of your existing loan)
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.
Cost range: Depends on how much you value your time!
Frequently asked questions
You generally do not need to pay a deposit when refinancing your home loan, but there are a range of fees you’ll probably have to pay. You may also have to pay for LMI if the value of your equity in the property (your initial deposit, plus the sum of your principal repayments so far and any capital gains) is less than 20% of the property’s value, or if you’re refinancing the loan to over 80% of the property’s value.
Most people don’t realise that every application for credit goes into their personal credit file. Refinancing your home loan often could impact your credit score which can make it difficult to receive lower interest rates for future applications.
Many loans have a maximum LVR of 95%, which means you can’t borrow any more than 95% of the value of your home. If you want to refinance, this means you must have at least 5% equity in your property. When it comes to refinancing, a general rule of thumb is to have 20% equity in the property to avoid having to pay for LMI.
Refinancing a mortgage can be costly, however, these costs can be recouped over time if you’re refinancing to a loan with a lower interest rate. The discharge fee will generally cost between $100-$400. The setup fees for the new loan can cost between $300-$1,000. A standard valuation fee alone can be between $200-$500.
To work out what your monthly repayments might be and how much you could save by refinancing, you can use our home loan repayment calculator.
You may want to refinance your mortgage for a range of reasons, including if you want to reduce your home loan interest rate, if you’re unhappy with your current lender, to consolidate debt, to fund a home renovation or extension, or to fund a big purchase (such as a car) at a lower interest rate.
Savings.com.au’s two cents
The number and magnitude of refinancing costs outlined above might seem daunting, but it’s important that they’re considered within the context of the long-term savings that can be generated by refinancing your home loan to a lower interest rate. Depending on your circumstances, you may even be able to recoup these costs after just a small number of monthly repayments. To help you decide whether its worth it, use a home loan calculator to help you work out how much you’ll save in interest over the life of the loan by switching loans, then weigh this amount against the total upfront costs of making the switch.
Make sure that you are thorough in working out which ‘change’ costs apply to you from both your existing lender as well as your possible new lender, so that you can come up with a definitive amount of ‘cost’ with which to compare your likely savings from your improved interest rate from your new lender.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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