How much does it cost to refinance?

How much does it cost to refinance?

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

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.

Refinancing Home Loans

 

Lender’s insurance

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. 

Negotiating

Handshake of a mature manager with a happy young couple at office. Businessmen handshake during meeting signing agreement. Happy man shaking hands whit his finacial advisor.

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.

Breaking even

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.  

 

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If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What fees are there when buying a house?

Buying a home comes with ‘hidden fees’ that should be factored in when considering how much the total cost of your new home will be. These can include stamp duty, title registration costs, building inspection fees, loan establishment fee, lenders mortgage insurance (LMI), legal fees and bank valuation costs.

Tip: you can calculate your stamp duty costs as well as LMI in Rate City mortgage repayments calculator

Some of these fees can be taken out of the mix, such as LMI, if you have a big enough deposit or by asking your lender to waive establishment fees for your loan. Even so, fees can run into the thousands of dollars on top of the purchase price.

Keep this in mind when deciding if you are ready to make the move in to the property market.

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

What is Lender's Mortgage Insurance (LMI)

Lender’s Mortgage Insurance (LMI) is an insurance policy, which protects your bank if you default on the loan (i.e. stop paying your loan). While the bank takes out the policy, you pay the premium. Generally you can ‘capitalise’ the premium – meaning that instead of paying it upfront in one hit, you roll it into the total amount you owe, and it becomes part of your regular mortgage repayments.

This additional cost is typically required when you have less than 20 per cent savings, or a loan with an LVR of 80 per cent or higher, and it can run into thousands of dollars. The policy is not transferrable, so if you sell and buy a new house with less than 20 per cent equity, then you’ll be required to foot the bill again, even if you borrow with the same lender.

Some lenders, such as the Commonwealth Bank, charge customers with a small deposit a Low Deposit Premium or LDP instead of LMI. The cost of the premium is included in your loan so you pay it off over time.

What is break fee?

Break fees are charged when a customer terminates a fixed-rate mortgage. The amount is determined at the time you decide to break the loan and is based on how much your bank stands to lose by you breaking the contract. As a general rule, the more the variable rate has dropped, the higher the fee will be.

Mortgage Calculator, Interest Rate

The percentage of the loan amount you will be charged by your lender to borrow. 

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

How can I negotiate a better home loan rate?

Negotiating with your bank can seem like a daunting task but if you have been a loyal customer with plenty of equity built up then you hold more power than you think. It’s highly likely your current lender won’t want to let your business go without a fight so if you do your research and find out what other banks are offering new customers you might be able to negotiate a reduction in interest rate, or a reduction in fees with your existing lender.