Refinancing a home loan is a strategy that many Australian homeowners consider to potentially secure a lower interest rate, access home equity, or consolidate debt. While refinancing can offer financial benefits, it also comes with a range of costs that should be carefully assessed before making a decision.
Many borrowers focus on the potential savings from lower mortgage repayments but overlook the upfront and ongoing costs associated with refinancing. Understanding these costs is crucial to determining whether refinancing is the right choice and when the benefits outweigh the expenses.
In this guide, Unconditional Finance breaks down the key costs of refinancing so you know what to expect and can make a well-informed, confident decision about your mortgage.
1. Loan Discharge Fees: The Cost of Switching Lenders
When refinancing, you’ll need to close your existing home loan, which may involve paying a loan discharge fee. Lenders charge this fee to cover administrative costs associated with finalising and transferring your mortgage.
Loan discharge fees vary between lenders and are influenced by the terms of your mortgage. This fee may be higher if your current loan includes special conditions or features, such as a package deal with an offset account. Some lenders waive discharge fees for long-term customers, so it’s worth checking with your bank before refinancing.
Before refinancing, review your loan contract or contact your lender to confirm the exact discharge fee applicable to your mortgage.
2. Break Fees for Fixed-Rate Loans: A Potentially High Exit Cost
If you’re on a fixed-rate mortgage, exiting the loan before the fixed term ends may result in break fees. These fees compensate the lender for any financial loss incurred due to changes in interest rates.
Break costs are influenced by several factors, such as the remaining term of your fixed-rate loan, fluctuations between your fixed interest rate and current market rates, and your outstanding loan balance.
For example, if you took out a fixed-rate loan at 4.5% and current interest rates have dropped to 3%, your lender may charge a break fee to recoup the lost interest. In some cases, break fees may amount to thousands of dollars, so it’s important to assess whether refinancing a fixed-rate loan could be financially beneficial based on your circumstances.
3. Application and Establishment Fees: Upfront Costs to Consider
When applying for a new mortgage, lenders may charge an application or establishment fee, which covers the cost of processing your loan.
Application fees vary by lender and depend on the specific loan terms and conditions. Some lenders waive this fee for new customers or as part of special promotions. Additional loan establishment fees may apply, covering the costs of setting up your mortgage account.
If you’re considering multiple refinancing options, it’s worth asking lenders if they offer no-application-fee loans or promotional fee waivers.
4. Property Valuation Fees: Assessing Your Home’s Market Value
Lenders require a property valuation before approving a refinance application to ensure that your home provides sufficient security for the loan. The cost of a property valuation varies based on factors such as the property type, size, and location. Some lenders offer free valuations as part of their refinancing package.
If your property’s value has increased since your original loan, refinancing may allow you to access additional equity. However, if the valuation comes in lower than expected, you might need to reconsider your refinancing strategy.
5. Settlement Fees: The Cost of Finalising the New Loan
A settlement fee (also called a legal or administrative fee) covers the cost of finalising your new home loan and transferring the funds from your previous lender to your new lender. This fee varies and typically includes expenses for document preparation, loan processing, and legal administration.
While this fee is relatively small, it’s important to include it in your overall refinancing cost assessment.
6. Lenders Mortgage Insurance (LMI): A Key Cost for Low Equity
Lenders Mortgage Insurance (LMI) is a significant cost that applies if you refinance with less than 20% equity in your home. Even if you paid LMI on your original loan, you may need to pay it again when refinancing with a new lender.
LMI costs vary depending on the loan amount and loan-to-value ratio (LVR). For example, on a $600,000 loan with an LVR of 90%, LMI may range between $10,000 and $15,000, though exact costs depend on the lender and insurer.
Ways to potentially reduce or avoid LMI when refinancing:
- Increase your equity to at least 20% before switching lenders.
- Stay with your current lender and explore the possibility of securing a better deal without refinancing elsewhere.
- Check if you qualify for LMI waivers, as some lenders offer them as part of home loans for professionals in specific fields.
7. Government Fees and Charges: State-Based Costs
In addition to lender fees, refinancing involves government fees that vary by state. These can include mortgage registration fees and discharge fees, which may increase the total cost of refinancing.
- Mortgage Registration Fee – This is a government fee for registering your new mortgage, with the cost varying by state.
- Mortgage Deregistration Fee – This fee applies when removing the old mortgage from the state registry.
Does Stamp Duty Apply When Refinancing?
Stamp duty is generally not payable when refinancing, except in cases where a borrower is added to the loan or the ownership structure changes. However, it’s always best to check with your state’s revenue office for confirmation.
For the most up-to-date information on government fees, visit the official websites of your state’s revenue office or consult our team.
8. Ongoing Fees That May Apply to Your New Loan
Some home loans come with ongoing costs that can affect the long-term savings of refinancing. These may include annual fees, redraw fees, or offset account maintenance fees, which can add up over time and reduce the overall financial benefits of switching loans.
- Annual Package Fees – Many home loan packages include offset accounts and credit card bundles, but they often come with an annual fee that varies by lender.
- Redraw and Offset Account Fees – Some lenders charge a monthly fee to maintain these features.
- Higher Interest Rates After Introductory Offers – Some lenders offer honeymoon rates for the first 1 to 2 years, but the rate could increase after the introductory period ends, depending on the lender’s policies and market conditions.
9. Potential Hidden Costs That Borrowers Often Overlook
When purchasing a home or refinancing a mortgage, there are several hidden costs that borrowers may not anticipate. These expenses can impact both short-term affordability and long-term financial planning.
Time and Effort Costs
The process of securing a home loan or refinancing is not just about finances; it also requires significant time and effort. Completing paperwork, submitting applications, and going through the approval process can take weeks or even months, particularly if additional documentation is requested by the lender. Delays can be frustrating, so being prepared with all the necessary paperwork may help streamline the process.
Credit Score Impact
Many borrowers do not realise that applying for multiple loans in a short period can temporarily lower their credit score. Every time you apply, a hard inquiry shows up on your credit report, which could make it harder to get the best loan terms. Spacing out applications and researching lenders beforehand can help minimise this impact.
Break-even Analysis
When refinancing, make sure to estimate how long it will take for the savings to cover the upfront costs. For example, if refinancing costs $4,000 and reduces monthly repayments by $200, it may take approximately 20 months to reach a break-even point, depending on other financial factors. If you plan to move or refinance again before reaching this point, the savings may not outweigh the costs. Understanding this timeline can give you a better idea of whether refinancing is the right financial move for you.
While these costs may not always be obvious, considering them in your decision-making process can help avoid surprises and lead to a more informed approach to homeownership.
Refinance Smarter and Make the Right Move
Refinancing a mortgage can offer financial benefits, but the associated costs must be carefully considered. Before making a decision, calculate all costs and assess whether long-term savings outweigh upfront expenses. Check your equity level to determine if LMI applies, compare multiple lenders to find the most cost-effective option, and seek professional advice if you’re unsure about the financial impact.
The costs involved in refinancing can vary between lenders, loan types, and individual circumstances. This guide provides an overview of the possible expenses, but actual costs may differ. To get a clear understanding of what applies to your situation, it’s best to consult a mortgage professional for personalised guidance.
If you’re considering refinancing, Unconditional Finance can help you find the right loan. Our expert mortgage brokers in Sydney can guide you through the refinancing journey, ensuring you understand all costs and potential savings. Contact us today!
Frequently Asked Questions
Yes, some lenders offer lower fees, cashback deals, or discounted rates for first-time homebuyers. Medical professionals, including doctors and dentists, may qualify for Lenders Mortgage Insurance (LMI) waivers or specialised loan packages, depending on the lender's criteria. Offers vary by lender, so checking available options is key.
Refinancing could allow you to consolidate debt into your mortgage, potentially reducing your interest rate. This can reduce monthly repayments, making debt management easier. However, spreading short-term debt over a long mortgage term can mean paying more in interest overall.
Refinancing can come with upfront costs such as discharge fees, application fees, and valuation costs. If you're on a fixed-rate loan, break fees may apply. Extending your loan term might reduce repayments but increase the total interest paid. Multiple refinancing applications in a short time can also impact your credit score.
Yes, but you may have to pay break fees, which can be costly. These fees depend on how much time remains on your fixed term, the difference between your locked-in rate and current rates, and your loan balance. If interest rates have dropped significantly since you locked in your loan, break fees can be high.
This is known as a cash-out refinance, often used to access home equity for renovations, investments, or debt consolidation. A higher loan amount generally results in larger repayments, and if your equity falls below 20%, LMI may be required again. Longer loan terms can also increase total interest costs.
