Refinancing has costs, and they vary by lender and loan. The real question is whether the savings from your new loan outweigh them, and how long that takes.
If you are a Queensland homeowner wondering whether a switch is worth the hassle, this article shows what you might pay, what you might not expect, and how to check the numbers before you commit.
What Does It Cost to Refinance a Home Loan?
The cost to refinance a home loan depends on your current lender, your new lender and your loan. Common costs include a discharge fee on the old loan, an application or settlement fee on the new one, a property valuation and government fees for registering and releasing a mortgage.
Not every lender charges all of these. Some waive application fees, and some cover the valuation. Fee schedules differ between lenders, so ask for each one in writing before you apply. A broker can collect these figures for you as part of the refinancing process, so you are comparing real numbers rather than headline rates.
Fixed Rate Break Costs: When They Apply
Break costs can apply if you leave a fixed rate loan before the fixed term ends. They are usually the largest refinancing cost, and they can be zero if you wait.
The amount depends on your lender's calculation, which generally looks at how much of the fixed term is left and how market rates have moved since you fixed. Your lender can give you a figure on request. It is only an estimate and it can change from day to day.
If your term is close to finishing, waiting may remove the cost altogether. Planning around fixed rate expiry means you can line up a new loan before the old one rolls onto a different rate. The trade-off is that you may pay a higher rate in the meantime, so compare the cost of waiting with the cost of breaking.
How to Work Out If Refinancing Pays Off
Refinancing pays off when the monthly saving, added up over time, passes your total switching costs. Divide your costs by your monthly saving and you have the number of months it takes to recover them.
As an example, take a borrower with $500,000 left on their loan and 25 years remaining. At an illustrative rate of 6.75% p.a., the repayment is about $3,455 a month. Say they find a lender offering a rate 0.50 percentage points lower. That is a hypothetical figure, not a quote. At 6.25% p.a. the repayment drops to about $3,298 a month, a saving of roughly $156.
Now assume switching costs total $1,500, which is also an assumption for this example. Divided by $156, the costs are recovered in about ten months. If they plan to keep the loan for several years, the switch looks worthwhile. If they expect to sell within a few months, it probably does not.
The result depends on the real rate gap, your fees and your loan amount, so run your own figures through a repayment calculator or ask us to do it with you.
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Costs That Do Not Show Up on a Fee Schedule
Some refinancing costs sit outside the fee list, and they are worth checking before you sign. They include lenders mortgage insurance, cashback clawbacks, a longer loan term and lost loan features.
Take each in turn:
- Lenders mortgage insurance (LMI). If your new lender values your property and your remaining equity is under 20%, you may be charged LMI again. The valuation matters here, so ask what figure the lender is using. If you want to avoid it, look at no LMI loans options.
- Cashback offers. A lender may pay you to switch, but some require you to repay it if you leave within a set period. Read the conditions before you count it as a saving.
- Resetting the term. A new 30 year loan can lower your repayment while raising the total interest you pay. You can keep your original term by choosing a shorter one.
- Features. Check whether your current loan has an offset account or redraw facility that the new loan lacks, or charges more for.
Each of these is a trade-off, not a reason to stay put. They just need to be in your calculation.
Is a Home Loan Health Check Worth Doing First?
A home loan health check is a quick review of your rate, fees and features, and it can show whether switching is worth pursuing before you spend anything. Often it shows a smaller fix, such as asking your current lender to review your rate, is enough.
That is a legitimate outcome. The aim is to put you in the right loan, not to refinance for the sake of it. Our loan health check looks at what you pay now and what a switch would cost, so you can see both sides before deciding. If you are also thinking about releasing equity or buying another property, it helps to check your borrowing capacity at the same time, because a new loan will be assessed on your current income and debts.
If the numbers do not add up, we will tell you. Call one of our team or book an appointment at a time that works for you, and we will go through your costs line by line before you decide anything.
Frequently Asked Questions
What fees can I expect when I refinance a home loan?
Common costs include a discharge fee, an application or settlement fee, a property valuation and government fees for the mortgage. Not every lender charges all of them, so ask for each fee in writing.
Do I pay break costs if I refinance during a fixed rate period?
You can, if you leave before the fixed term ends. The amount depends on your lender's calculation, and waiting until the fixed term finishes can remove the cost.
How do I know if refinancing will pay off?
Divide your total switching costs by your monthly repayment saving. That gives the months needed to recover the costs, which you can compare with how long you plan to keep the loan.
Can refinancing cost me more in the long run?
It can, if you reset to a longer loan term or lose features like an offset account. Keeping your original term and comparing features helps you avoid this.
