Refinancing a home loan can be a simple process, but there are usually upfront costs involved. So is it worth it?
- Why should you refinance?
- Mortgage application fees
- Valuation fees
- Discharge fees
- Break costs
- Settlement fees
- Registration fees
- Exit fees
- Refinance FAQs
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.
Smart Booster Home Loan
- Discount variable for 1 year <=80% LVR
- No ongoing fees
- Unlimited redraw facility
Monthly repayments: $1,476
- Discount variable for 1 year
- No ongoing fees
- Unlimited redraw facility
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) owner-occupied 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. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.
Why should you refinance your mortgage?
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. The Australian Competition and Consumer Commission (ACCC) itself has said the average borrower could save $17,000 in interest just by switching to a new loan.
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.
Costs of refinancing a home loan
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.
See also: A summary of all home loan fees
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 refinancing externally with another lender, you may be required to pay an application fee. Also known as an ‘establishment’ fee or just an upfront 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.
The average mortgage application fee is around $250, while the highest can be as much as $800-$1,000.
The table below displays a selection of owner-occupier (OO) home loans with a $0 upfront fee, sorted by interest rate (ascending).
2. Property 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 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).
A valuation can cost up to $775, while the average is somewhere around $200. These fees can be as little as $50, while there are plenty that don't charge one or simply include it in the application fee.
3. Discharge fee for termination of mortgage
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.
The average discharge fee can be up to $1,000, but typically sit around $200-$400 on average.
The table below shows home loans with some of the lowest interest rates on the market that also have $0 discharge fees:
4. Break cost
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. The average cost to break a mortgage can be many thousands of dollars, and always get a definitive answer from your lender as to exactly what it will be. One example Savings.com.au found was a customer being charged a break fee of $35,000.
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.
The average cost to settle a home loan can be about $210, but they're commonly between $100 and $400. The highest is as much as $800.
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. The registration fee can cost anywhere between $100 and $180 on average (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. This cost can range between $0 and $7,000. You'll need to check the terms of your existing loan with your lender to find out if an exit fee still 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. The 2020 St. George Home Buying Survey found buyers spent 44 hours looking for their first property before even undertaking the home buying process!
This cost depends on how much you value your time. Home loan pre-approval can potentially save you some of that time.
Do I need a deposit to refinance my home loan?
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.
How much equity do I need to refinance my house?
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.
Does refinancing a home loan hurt your credit?
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.
How much can refinancing save me?
Nothing is guaranteed in finance, but you can potentially save thousands or even tens of thousands of dollars simply by refinancing to a superior home loan. 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.
Savings.com.au also has a refinancing costs calculator.
5. How do I know if I should refinance my mortgage?
You may want to refinance your mortgage for a range of reasons, including if you want to reduce your home loan interest rate, being unhappy with your current lender, to consolidate debt, to fund a home renovation or extension, or to fund a car purchase at a lower interest rate.
See also: Should I Refinance my Home Loan?
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.
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 2020. 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 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
- If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au
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, Performance Drive 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.
*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may inﬂuence the cost of the loan.
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