What are the costs of refinancing your home loan?
Refinancing can potentially save you thousands on your home loan, but there are also costs that come with doing so.
Refinancing can potentially save you thousands on your home loan. If you are considering refinancing, you are probably focused on getting a lower interest rate. It’s important though to also account for the range of other costs of refinancing a home loan.
Prior to refinancing, it’s vital to review whether the long term savings outweigh the upfront costs.
Why refinance?
Refinancing a home loan occurs when a borrower moves their mortgage from one lender to another. When you refinance, you essentially take on a new loan for the remaining amount you owe. If, for example, you change to a different lender, your new lender will pay your current lender the outstanding amount, then you pay off your new creditor at a new rate.
There are several reasons you might refinance. Most common is to take advantage of a home loan with a more competitive interest rate, but there are a variety of others. Below is a selection of some of the usual motives for refinancing:
- If you have built up a significant amount of equity in your home, you might be able to refinance and take out a larger sum, that you could use for renovations or even other large expenses like a holiday.
- Alternatively, you could refinance and take out a larger amount that you then can use to consolidate debts, from credit cards or personal loans, for example.
- If you have separated from your partner who you co borrowed with, you’ll need to refinance to take control of the home loan on your own. Most banks will not allow you to simply remove a co borrower.
Types of fees you can expect to pay
There are a number of upfront fees that can come with refinancing, however, these fees and how much they cost differ between each lender.
It’s important to take the cost of these fees into account when refinancing but also look at ongoing costs. Some lenders may have higher ongoing costs but little or no upfront costs. When you borrow with loans.com.au the upfront costs are low, and you will not be charged any monthly fees.
These are examples of some of the typical costs to refinance a mortgage.
Discharge fee
When leaving your existing lender, there is a lot of work that goes in to preparing and processing your discharge of mortgage. Many lenders will charge discharge fees, such as a discharge administration fee, documentation fee, or even a settlement agent fee. Make sure to check your loan contract to confirm exactly what you will need to pay.
Break fees
A fixed-rate mortgage means you will lock in your interest rate for a period of time, typically one to five years. If you refinance in this fixed period you’ll have to pay break fees, to cover the losses the lender may experience as a result of the loan not running for the originally agreed term. Break fees can be complex to calculate so it is worth contacting your lender to ask for an estimate of how much it may be if you decide to refinance. Break fees are usually very expensive, so much so that in some cases that it is recommended you hold off refinancing.
Application fees
If you are switching home loans to a new to a new lender, you may be charged an application fee, also known as an establishment, set-up, or start-up fee. This is a one-time fee charged to cover the cost of processing and documentation of the mortgage.
LMI
Lenders mortgage insurance (LMI) is charged when you borrow more than 80% of a property’s value from a lender. If you haven’t built up enough equity in your home or the property has dropped in value, you may have to pay LMI when refinancing. LMI can rack up into the tens of thousands and borrowing more money means you’ll pay more in interest over the life of the loan, so where possible it’s recommended you avoid paying LMI.
Security assessment fee
A home loan is secured against the value of the property under mortgage. Therefore, lenders will typically require a property to be valued prior to approving you for refinancing, so they know the worth of their security.. The cost of this depends on the lender and the location of your property. Metropolitan areas are usually cheaper to value, given they are typically more accessible than rural areas.
Settlement fee
A settlement fee is paid to your new lender to settle your new loan. It covers the cost of the lender arranging the loan settlement.
Title search fee
When you refinance, your new lender needs to verify that you are the owner of your property. You will need to pay them a title search fee, which they will then pass on to the relevant state or territory authority to check this.
Is refinancing worth it?
When you are considering refinancing, you need to consider both the benefits and costs of doing so. For example, you might find a product with a slightly lower interest rate than your current loan, but by the time you factor in the applicable of the above costs, you could find you would actually be paying more than you were originally. It is always a good idea to run the numbers over the entire loan term, and work out whether refinancing leaves you in a better position.
As a home loan holder, you should keep yourself up to date with your refinancing options. We recommend reviewing your loan at least every 12 months to see if you have the best rate possible. It never hurts to browse around and see what sort of deal you can get elsewhere.
Refinancing with loans.com.au
Refinancing is all about paying less money on your home loan. Lets say you have $350,000 still to pay on your mortgage over 20 years, at an interest rate of 7%. If you refinance and switch your home loan to loans.com.au’s Smart Booster Home Loan, at a variable 5.1% interest rate (correct as at 10th February 2023) you might be able to save up to $92,237 in interest over the life of your loan. You’d also have access to unlimited redraws, unlimited additional repayments, and pay no ongoing fees.
Let’s have a look at a couple of scenarios to see how much you could save by switching to this loan.
Scenario 1
If you’re an owner-occupier who owes $450,000 on your current loan, with 25 years left on your loan at an interest rate of 6.5% p.a, you could save up to $114,448 over the life of your loan.
Scenario 2
If you’re an owner-occupier who owes $750,000 on your current loan, with 15 years left on your loan at an interest rate of 6% p.a, you could save up to $152,822 over the life of your loan.
Check out our refinance calculator to see how much you could save with us.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
