If you are weighing up the pros and cons of refinancing, you will need to consider the costs involved in the process.
While these costs can generally be recouped in a matter of months, it is important to be aware of what you will be expected to pay up front. The more information you can gather, the less likely it is that you will be surprised by an unexpected expense down the track.
Common refinancing costs
Discharge fee: $100-$400
Break fee (for fixed loans): Will vary depending on how much variable rates have dropped
Set up fees: $300-$1000
Lender’s title insurance (for Fast Track refinance): $500-$3000
Lender’s mortgage insurance: Will vary depending on borrower’s circumstance
Common refinancing fees
When you look into refinancing, the most obvious costs you will notice are fees charged by both your old lender and your potential new lender. The first of these fees will be a discharge fee charged by your old lender to cover the cost of the paperwork involved in closing your loan. This fee will generally cost between $100-$400.
If you currently hold a fixed rate loan, you may be required to pay an additional break free for ending your loan during the fixed rate period. You will need to check with your existing lender if this fee applies and how much it will be.
Your new lender will then charge what are called set up fees. This is a combination of an establishment fee, valuation fee and settlement costs. Depending on how much each fee costs your total set up expenses could be between $300-$1000. A standard valuation fee alone can be between $200-$500.
As the fees charged by both lenders will eventually be added to your new loan, if you don’t pay them off upfront you will end up paying interest on the cost over the life of the loan. This may see you pay thousands more than the initial fee cost and should be avoided for this reason.
In some cases, when refinancing, you may be obligated to pay some form of insurance depending on your borrowing circumstances. This is insurance that covers the lender if you are deemed to be a risky borrower or borrowing under risky circumstances.
If you are refinancing to a larger loan, or you have not yet built up 20 per cent equity in your current loan, you may have to pay Lender’s Mortgage Insurance (LMI). This could potentially add thousands to your refinancing bill so it should be on your radar early on.
If you choose to refinance using a Fast Track refinance process, you will most likely be asked to pay title insurance to cover the lender for the period before your property’s title is officially transferred. This can cost between $500-$3000 but may also be covered by some lenders to earn your business.
While at first glance the long list of potential fees may seem like a big financial burden, you should keep in mind that many lenders will negotiate on set up fees to earn your business. They may also offer to cover your discharge fee to entice you to switch.
Even if these offers aren’t made up front, you can still negotiate with a potential lender to reduce the amount of fees you need to pay. Doing your market research and knowing which lenders are offering which deals will give you some leverage to negotiate with your preferred lender.
As established, refinancing is likely to come with added expenses but the upside is that it should also save you money in the long term. The point where the amount you have saved on reduced repayments and ongoing fees cancels out the amount you paid to refinance is referred to as your break even point. For most people, this point will be reached in a matter of months.