Refinancing your home loan: What are the costs?

Refinancing your home loan can give you access to more attractive rates and features, making the path to home ownership that much smoother. But while refinancing can save you money in the long run, you might find yourself having to pay a number of fees just to kick off the process. We take a look at some of the main ones below.

Discharge fee

Also known as a settlement, termination, or loan exit fee, this is the fee charged by your current lender to cover the admin involved in closing your loan. Among banks and lenders we track, discharge fees range from $0 to $550.

Break fee

If your current loan is a fixed rate, there’s a chance you will have to pay a break fee. This is because banks borrow from wholesale money markets to fund the loans they issue, and when you sign up for a fixed rate loan the bank also fixes its funding costs to hedge against any interest rate changes. 

If you end your fixed rate loan early, your bank still has to repay the loans it took out at the same rate until the end of the agreed period. This can come at a significant cost to your lender if interest rates have changed, in which case it will pass the cost onto you.

How much you’ll have to pay will depend on the interest rate, the outstanding balance, and how much longer is left on the fixed rate term. The exact amount can be difficult to estimate, so it’s worth contacting your lender to get a clearer idea. 

Application fee

Also known as an establishment fee, this is the one-off fee your new lender will charge to set up your loan. Application fees are usually payable upon settlement or funding, and range from $0 to $995 among variable rate home loans we track.

Property valuation fee

To determine whether your loan is enough to cover the cost of your property, your new lender will arrange to have your property assessed by a third party. The assessor will take into account the location of the property, its size and condition, the number of rooms, and any additional features. 

Mortgage registration fee

Your lender will need to register your mortgage onto the title record for the property. It pays a fee to the relevant state authority on two occasions — once when the mortgage is established and once more when it is discharged. The size of the fee will vary across states.

Rate lock fees

If you apply for a fixed rate home loan, your new lender will give you the option to lock in the interest rate that is quoted at the time your loan is approved. This is offered as protection against any rate hikes your lender might make in the period between approval and settlement. 

Just make sure you have a good understanding of where mortgage rates are heading and whether a rate lock is necessary in the first place, as the fees can cost up to $750. What’s more, if you opt for a rate lock and mortgage rates drop in the interim, you might be stuck paying the higher rate.

Paying LMI again

Borrowers with a loan-to-value ratio (LVR) of less than 80% are generally required to purchase lenders mortgage insurance (LMI). This protects the lender from losses in case the borrower is unable to make repayments on their loan. 

Unfortunately, LMI is non-transferable, so if you’re thinking about refinancing but haven’t managed to bring your loan-to-value ratio below 80%, you’ll probably wind up paying the insurance premium twice over. However, some lenders might be willing to offer you a refund of some kind, so be sure to discuss your options with your current lender.

Stamp duty

Stamp duty is a government tax imposed on real estate transactions. The amount of stamp duty you’ll have to pay will depend on the value of the property, its location, and whether it is your primary residence. In some cases, you may be able to get an exception from paying stamp duty, such as if you borrow under the same name, keep the size of the loan the same, and refinancing internally (keep the same lender but change loans).  

Ongoing fees on your new loan

You’ll also need to be aware of any fees that your new lender will charge over the life of the loan. These might include

• Monthly or annual servicing fees: these cover the cost of managing your home loan over time.

• Extra repayment fee: some loans, particularly fixed rate loans, penalise you for making too many extra repayments in a year. 

• Redraw fee: some lenders charge you each time you use a redraw facility.

• Late payment fee: this is charged if your account falls into arrears. 

While the list of refinancing-related expenses might seem long, borrowers shouldn’t let it discourage them from replacing their home loan with a better one, especially if there are significant savings to be made.

It can help to pinpoint the month in which the amount you’ll have saved by switching finally exceeds the costs involved. This is your break even point, and it can be calculated by dividing the costs by your monthly savings.

For example, if you successfully refinance your loan to one that saves you $100 per month, and the total cost of doing so comes to $1,000, you can expect to break even within 10 months (1,000 ÷ 100 = 10).

For more information, browse our refinancing hub. And if you’re in the market for a home loan, visit our home loan comparison page, or check out the selection below.