What does it cost to refinance a home loan?

Rising interest rates push up the cost of regular repayments for many people with a home loan, so a mortgage refinance could be on your “to do” list. We look at how much it costs to refinance a home loan.

What does it cost to refinance a home loan?

Switching to a new loan or lender has the potential to help you pocket savings with a lower loan interest rate or improved loan features. But refinancing can come with a raft of different home loan fees. Here’s what it can cost to switch to a new loan or lender.

There are two types of home loan refinance: an internal home loan refinance and an external home loan refinance.

1. An internal refinance occurs when you change to a different home loan with your existing lender.
2. An external refinance involves moving your loan to another institution. This will typically mean paying at least some costs as your existing lender and the new lender are likely to charge a variety of fees.

What fees do I have to pay when refinancing?

Home loan refinance costs will vary depending on your individual circumstances. Some common refinance costs to enquire about include:

• Discharge fees: An administration fee paid to your current lender to pay out the existing loan in full and to prepare the required documentation.
• Application fees: The fee associated with making a new loan application.
• Valuation fees: A fee charged by the new institution to cover the cost of obtaining an up to date valuation on the property that you are offering as security.
• Land registration fees: These are the fees to remove the existing mortgage from your current lender and register a new mortgage to your new lender.
• Lenders Mortgage Insurance (LMI): If you have less than 20% equity in your property, your new financial institution may charge you lenders mortgage insurance (LMI). This protects the lender against mortgage default. You may be up for LMI when you refinance even if you paid an LMI premium when you first took out your current loan.
• Ongoing fees: Some mortgages, such as packaged home loans, may charge an ongoing fee.
• Break fees: If you’ve a fixed rate home loan, you may also be hit with a contract break cost if you decide to refinance during the fixed rate period. This represents compensation for any loss of profit to the bank by your decision to break the contract. Break costs may or may not be charged depending on interest rate movements at the time.

The overall costs will vary according to a number of factors, including which institution you’re currently with, which institution you are going to and in which state/territory you live.

You can use our Loan Comparison Calculator to work out the difference in repayments between two loans. But you will also need to calculate the other fees and charges into your estimations.

What’s the average cost to refinance a mortgage?

Refinancing has the potential to come with very low costs, but it can also be expensive.

According to some of the fees charged by lenders on Canstar’s database, at the low end of the scale you could pay as little as $75 in refinancing fees. A more mid-range average cost is $809, but at the top end of the scale you could pay fees totalling an average of $2,108.

These costs don’t take into account mortgage deregistration fees, which vary from state to state.

Cost to refinance a home loan

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Source: Canstar.com.au – 16/05/2023. Based on owner occupier variable loans on Canstar’s database, available for a $500,000 loan amount, 80% LVR and principal and interest repayments, excluding introductory, first home buyer only and other special condition loans. Valuation, legal, documentation and settlement fees are often calculated at cost; the values in this table are based only on lenders that advertise a fixed value.

Not all lenders on Canstar’s database charge these fees so you should check first before making any decision.

Your existing lender should be able to give you information about any fees associated with discharging your loan with them, or check the important documentation such as the Key Facts Sheet (KFS).

Your new lender should be able to give you information about your new loan application and associated fees. It’s important that you read all important documentation before signing on for a new home loan, such as the Target Market Determination (TMD), Key Fact Sheets (KFS) and any other terms and conditions.

How does refinancing a home loan work?

Your new lender will be able to give you information about how much the refinancing process will cost, how long it will take and how it will work. But the process is typically similar to what you would have gone through when you applied for your existing home loan.

1. Research your loan options and work out if you can get a better deal.
2. Find out how much it might cost to leave your existing lender.
3. Choose a lender or ideally narrow down a shortlist and ask each for a quote for how much it would cost to refinance. It might also be worth asking your existing lender if they could give you a better deal as you are considering refinancing.
4. Do your sums – work out if, in fact, you would gain the benefit you had hoped for when the fees and new interest rate is taken into consideration. Canstar’s Loan Comparison Calculator may help. You may want to consider getting some independent financial advice.
5. When you apply for your new home loan you’ll need to provide information such as details about your home, mortgage and finances. The new lender will most likely check your credit history, so it could be a good idea to check your credit score first so you know where you stand.
6. When you gain approval for the loan, you will need to sign a contract.
7. When you’ve accepted the loan offer, typically the new lender will arrange for the discharge and transfer of your existing loan from your old lender to your new one.
8. You will then pay your mortgage repayments to your new lender. It’s possible that your repayments may change in amount and frequency, depending on your agreement with your lender.

Is the cost of refinancing a home loan worth it?

While the fees you pay to refinance can vary significantly, the common thread is that switching home loans will likely come with costs. This makes it important to weigh up the cost versus the savings of the new loan to be sure refinancing puts you in front financially. The sooner you can recoup the costs, the better.

Just how much you save will depend on your new loan. As the table below shows, a home loan, rated 5-stars by Canstar, could see you paying a lower interest rate than the rest of rated products.

On a $500,000 mortgage, that could mean saving $280 on monthly repayments which would add up to a saving of about $101,050 over the term of a 30 year loan.

Variable home loan cost – 5-star rated products vs rest of market

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Source: www.canstar.com.au – 15/05/2023. Rates based on those available for a loan of $500,000, 80% LVR, and principal and interest repayments; excluding introductory and first home buyer only loans. Institutions based on those included in the products rated by Canstar in the May 2023 Monthly Star Ratings. The monthly repayments and total interest cost are based on a 30 year loan term.

Remember that some lenders offer cashback and other deals to encourage you to refinance with them. These sweeteners can help you recover all or part of the costs to refinance, but a quick perk shouldn’t shape decisions about a long-term product such as a home loan.

It always makes sense to be sure your new loan comes with a competitive rate and the loan features you need. Any additional benefits such as a cashback payment should be the icing on the cake – not the main game that decides your choice of loan.

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