Amid Australia’s competitive home loan market, many Aussie homeowners have the power to refinance their mortgage to a lower interest rate. This 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. 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 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.
Upfront costs of refinancing
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.
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
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
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
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).
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
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)
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)
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!
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 Savings Lesson
- Refinancing often provides the opportunity to save money on your monthly repayments because you can get a lower interest rate than your existing loan.
- But the level of savings is not wholly reliant on how low a rate you can get – there are almost always ‘refinancing costs’.
- The refinancing costs need to be factored in to work out HOW MUCH (the net) savings you will actually make.