Many people choose to refinance their home loan to escape overbearing interest rates or tailor their mortgage terms to suit their needs. Whether that is through paying the loan off faster, leveraging built-up equity, or switching from a fixed rate loan to a variable one.
Regardless, while refinancing can provide you the flexibility of a new home loan that better suits your current financial needs, it comes with various costs. These can be upfront or ongoing fees, but most are not intended to drain your bank.
This guide will go over the fees you may encounter while refinancing your home loan, allowing you to decide whether or not switching loans is cost-efficient for you.
Refinancing is the process of exchanging your existing home loan with a new one; this can be through your original lender or with a competing offer. Choosing a new home loan is intended to obtain you better interest rates or loan repayment terms for your current financial circumstances.
By refinancing, you can save more money, pay your mortgage off sooner, and even access your home equity for usable cash.
The reasons why refinancing is important to your home loan are always dependent on individual financial situations, but the most common causes are:
Although refinancing your home loan is done with the intent of pocketing more savings, there are fees associated with changing loans. The cost to refinance a home loan can come as low as $75, but on average, you will be looking to pay $807.
However, loans at the top end of the scale could face fees totalling an average of $2,108.
In any case, the exact cost of refinancing a home loan depends on the fees attached to your new loan and those accrued from exiting your previous mortgage. Your original lender should be able to provide you with information on any costs gained from discharging a loan with them.
In much the same way, your future lender is capable of establishing the fees that come from applying for a new loan. It is best to always ask for both sets of fees so that you are not surprised by additional ongoing fees or upfront charges.
You should always check with your current and future lender before applying for a new loan to get the scale of your possible costs and when these fees will come into effect.
Typically, you can expect the upcoming costs of refinancing your home loan to come in three stages.
These stages and their specific costs are:
Break costs are a fee that applies if you’re on a fixed-rate loan and you refinance before the fixed-rate period ends. These fees cover potential losses your current lender may face due to your agreement not carrying to full term.
The specific costs vary depending on your lender, but the average cost to break your existing mortgage can be thousands. It is always advisable to check with your current lender and get a definitive estimate before refinancing.
Applying to both variable and fixed rate home loans, a discharge fee may be expected when closing your current loan to cover any administration costs. This fee includes the process of paying out your existing loan, as well as covering the preparation of the documents required to exit your loan.
This can stretch to $1,000 but, on average, sticks between $200 and $400.
Depending on your level of equity, a new lender may need a property valuation before allowing you to refinance with them. The fee is always reflective of the lender and the location of your property, with fees most commonly trending higher in rural areas over urban ones.
A property valuation fee typically costs around $200, but it can be as high as $775. However, even the inclusion of this fee varies between brokers, and a new lender may choose to include it in your application fee or not charge you at all.
If you are refinancing your home loan with a new lender, it is likely that they will require an application fee to cover administrative costs and the setting up of your new loan.
This mortgage application fee often comes in the form of an upfront payment, and can reach roughly $1,000 on the high end of costs. Some lenders may also include your property valuation within the fee.
A settlement fee is included during refinancing to cover the legal costs of your new lender settling your new home loan. This usually covers the arrangement of a legal representative for the lender to attend the loan settlement.
Settlement fees typically sit between $100 to $400 but can cap off at around $800.
Depending on your location, you may need to pay a mortgage registration fee to the state or territory government. This fee covers adding your new mortgage to a register and prevents you from selling the property and not paying your lender.
The costs vary for each state and territory but tend to sit between $100 to $200.
Of course, time is just as important as money when refinancing your home loan. After deciding to embark, switching to a new home loan can take up to 4 to 6 weeks.
It can take even longer if you face difficulties with paperwork, or if your current lender causes delays in an attempt to keep you in the business.
Also referred to as ‘Lender Legal Fees’, this ongoing cost is charged by some lenders when settling a loan to borrowers. It can be charged separately from other fees, but many lenders opt to include legal fees within the discharge fee.
Additionally, for those unsure of going into the refinance process alone, you can consider seeking help from a solicitor or conveyancer. This help comes with additional fees, but the pricing depends on the service and representation you choose.
If your Loan to Value Ratio is above 80%, or your existing equity is less than 20% of your property’s value, you may need to pay Lenders Mortgage Insurance (LMI). This additional cost protects the lender in case you fail to keep up with your home loan repayment schedule.
The amount of LMI you are required to pay usually amounts to 1-3% of your home’s value, but these costs are also relative to your loan amount, property value, and the premiums your state or territory offers.
It should be noted that LMI does not go towards repaying your home loan principal and is typically paid on top of your monthly repayments.
Refinancing your home loan will always come with new terms and conditions, and the ongoing fees from these new terms will always vary. Factors that will have the biggest impact on accruing ongoing fees are:
You will also need to look for regular monthly and early repayment fees.
Annual costs and maintenance fees may incur when accessing the features of your new home loan. This is typically involved with features such as redraw and offset accounts.
The overall costs of these fees vary between lenders. While some do not charge a fee, some may charge up to $750.
In this example, India has an existing loan of $400,000 with a 15-year term. Her existing interest rate is 5% p.a, and she currently has no redraw facilities or offset accounts to reduce her interest.
Consequently, India’s monthly repayments come to $3,173.
Assuming that the loan term remains the same when refinancing, and India was to switch to a more competitive interest rate of 4.6% p.a., her monthly repayments would now be $3,095 in the introductory term, and then $2,703 thereafter.
Over the lifetime of her new loan, India could save $79,767.
This variable would change if she switched to an agreement with a higher repayment rate. This would allow her to save and shorten the overall length of her loan term. For example, if she shifted to a repayment of $3,173, she could reduce her term by 2 years and 5 months, and potentially save $92,839 over the life of the loan.
As the upfront costs of refinancing will be the most expensive fees needed to account for during refinancing, India’s savings will not change drastically if she is made aware of the refinancing costs and has already set aside money for these fees.
In this situation, India should consider refinancing her home loan.
In the long term, it is usually worth accruing some costs in refinancing your home loan as there is a high chance you can save thousands.
If you have researched and budgeted for the potential fees coming from current and future lenders, the upfront costs of refinancing are minimal in the face of the thousands you will save. However, this research can be daunting. Reviewing your financial situation is the first and most important step to considering if the costs are personally worth refinancing your home loan.
An online refinance calculator is useful to aid in this research process.
Regardless, lenders recommend that you look at all of the ongoing fees associated with refinancing and assess whether you can cover them. The specific things you should regard with respect to influencing your day-to-day life and financial well-being are:
At the end of the day, it is all about how you can better your loan experience and your potential to save. If you feel that a change will suit your needs, then refinancing may be the perfect solution.
If you are seriously considering refinancing your home loan, Joust is the perfect platform to connect you with lenders and home loans that suit your specific needs.
Joust is a free-to-use online mortgage marketplace with access to over 80% of Australia’s home lenders. After placing your current mortgage details on the site, Joust’s Live-Auction function takes all the responsibility of finding a new loan off your shoulders. Lenders will compete against each other for a chance to offer you competing and increasingly lower interest rates.
For those considering seeking out a new home loan to refinance with, Joust is one of the most convenient and user-friendly platforms available today.
While you do not necessarily need a conveyancer or solicitor to refinance, it is highly recommended. Due to refinancing requiring the same documentation for your existing loan, you will need their services for the settlement of your new mortgage to occur.
Only if you are given more than 80% of your property value is it highly likely that you will have to pay Lenders Mortgage Insurance (or LMI) in the process of refinancing. You may have to pay this despite already covering it on your original loan, but it depends on whether you still owe an excess of 80% of your home's value.
The best time to refinance usually depends on the shifting of interest rates. If rates have dropped by more than 1%, then refinancing at that moment is a good time. In the end, however, the best time is when you are most financially secure and prepared to refinance.
The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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