Refinancing can potentially save you thousands on your home loan, but there are also a number of upfront costs to consider. Find out the average cost of refinancing a home loan in Australia and whether it's worth it in the long run.
What is the average cost to refinance a mortgage?
There are a number of upfront fees that can come with refinancing a home loan. However, the costs of these different fees and whether they are charged at all will depend on the lender. Rebecca Jarrett-Dalton, founder of mortgage brokers Two Red Shoes, told InfoChoice the average cost is about $1,000.
It's difficult to give a definitive answer as the cost of refinancing varies between lenders. At the low end of the scale, you could pay just a couple hundred dollars, whereas you could pay well over $1,000 at the top end - especially if you need to pay LMI.
The potential savings of refinancing need to be considered alongside the initial costs of refinancing to help you determine whether it's worth it. When assessing the cost of refinancing, calculate the total cost as opposed to the separate charges between different lenders. This ensures you receive the most accurate cost possible.
Mortgage application fees
If you're migrating to a new lender then they might charge an application fee, otherwise known as an establishment fee. This is a one-off payment that covers the cost of processing and administering the new loan. The fees are typically around the $250-$350 mark while the highest can cost upwards of $800.
Early exit fees
Following government reforms, early exit fees apply only to mortgages taken out before 1 July 2011. This cost can range between $0 and $7,000 so be sure to check the terms of your existing loan to find out if an exit fee still applies to you.
A break fee may apply when you have a fixed rate mortgage and you refinance to another provider before the end of the fixed term. These fees cover any potential losses your current lender might face due to the 'economic cost' of that agreement not running to its originally slated term.
Break costs generally depend on the loan amount, the length of time remaining on the fixed term, and interest rate movements at the time. Typically, break fees will be higher if interest rates have gone down since the start of the fixed term.
As break fees can vary and be extremely costly, it's worth contacting your lender to ask for an estimate if you're considering to break your fixed term and refinance. This can cost many thousands of dollars so you'll want to make sure it's worth it.
Depending on the level of equity you have in your property, a new lender may require a valuation to be done before prior to approving you for refinancing. The cost of this often depends on the lender and the location of your property. For example, valuation fees tend to be cheaper in metropolitan areas, given they are more accessible than rural areas.
A valuation fee can cost anywhere from $50 to $775. You may even find some lenders don't charge one to begin with.
Discharge fee for termination of mortgage
Also known as a 'termination' fee, mortgage discharge fees are paid to your current lender to cover the administrative costs required to end the loan contract. Discharge fees are only applicable when you're refinancing externally.
The average discharge fee can be up to $1,000, but typically sit around $200-$400 on average.
Settlement fees are paid to a new lender to settle the new loan. It covers the cost of the lender arranging a legal representative to attend the loan settlement. This fee costs anywhere between $100 to $800 depending on the lender.
Mortgage registration fees
A mortgage registration fee is charged by a state government for the mortgage to be added to a register to prevent you from selling the property without paying back the lender. The registration fee can cost anywhere between $100 and $180 on average (varies by state and territory).
Lenders mortgage insurance (LMI)
If you haven't built up enough equity in your home and you're looking to borrow more than 80% of the property's value, you may be required to pay LMI again when refinancing.
LMI can be an expensive fee and you don't want to have to pay it more than once, so where possible, it's recommended you hold off on refinancing until you build up enough equity.
How much can I save by refinancing?
The level of savings generated through refinancing depends on:
- The size of your mortgage
- How many years you have left on the loan term
- How much lower the new interest rate is compared to your current rate
Rebecca Jarrett-Dalton, founder of mortgage brokers Two Red Shoes, told Savings Media Group the average first-year saving she's seen by her clients refinancing is about $2,000 on the low end, and up to $6,000 on the high end.
Ms Jarrett-Dalton said the highest saving the firm has seen was $22,000.
Keep an eye on current market rates in the home loan space and also do some research to see what incentives different lenders are offering for you to jump ship e.g. cashback offers that could sweeten the deal.
Suzy is currently paying 5.25% p.a. on a 30-year home loan with an outstanding balance of $500,000. The monthly payments are $2,761 per month.
Suzy finds a new deal for 4.89% p.a. and decides to switch to the new loan.
By switching the loan, the new monthly repayments are $2,651 a month - $110 a month in savings or $1,320 in the first year.
Provided variables stay the same, Suzy could save $39,752 in payable interest over the life of the loan.
Check out our refinance calculator to see how much you could save.
Can I refinance a fixed-rate home loan?
If you're on a fixed-rate deal, then it's best to wait until this period ends before refinancing to avoid break fees. Break fees are usually a calculation on your current circumstance, how long you have left on the fixed term, and wholesale and market factors.
Breaking out of a fixed term could cost thousands or tens of thousands, which would make refinancing hardly worth it.
When is refinancing not worth it?
In many cases, refinancing is worth it. However there are some particular circumstances where it's not.
1. You're on a fixed-rate home loan
Break costs can easily nullify any benefit of refinancing in the first place. If you're unlucky, you could be paying thousands or tens of thousands to break out of a fixed-rate loan, which would take many years on the new lower rate to recoup.
2. You don't have at least 20% equity
It's generally not advised to refinance if you haven't bought the property with a 20% deposit or at least have 20% equity. This means on a $1 million property you'd have at least $200,000 equity. This is because if you refinance with less than this amount, the new lender will likely charge LMI, which can nullify any benefit of refinancing.
3. You're in a 'mortgage prison'
A mortgage prison is a tricky scenario that usually involves interest rates having risen rapidly - and your serviceability has taken a hit - coupled with declining home prices. This perfect storm probably means you can't even move from your current lender in the first place. This means you'll have to ride out the storm, and continue paying the uncompetitive rate until you've built more equity as interest rates stabilise.
4. You're nearly at the end of your mortgage or close to paying it off
Many lenders' minimum loan amounts are $150,000 - if you have less than this on the balance of your mortgage, you probably can't refinance or it might not make sense. Further, refinancing usually takes a year or two to see the full benefit.
If you've only got a couple years left on your mortgage, it probably doesn't make sense to pay the costs of refinancing only to discharge the mortgage a short time later.
5. You're planning to sell soon
Similar to the point above, if you're planning on selling the home soon, it doesn't make sense to pay for the costs of refinancing - which could take a year or so to recoup - if you're just going to sell the home and discharge the mortgage anyway. Hopefully the capital gain you've made on the home in your tenure makes up for the uncompetitive mortgage rate you've been paying.
Home Loans: The comparison rates are based on a loan amount of $150,000 and a term of 25 years.
WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.
The products compared in this article are chosen from a range of offers available to us and are not representative of all the products available in the market and influenced by a range of factors including interest rates, product costs and commercial and sponsorship arrangements
InfoChoice compares financial products from 145 banks, credit unions and other financial institutions in Australia. InfoChoice does not compare every product in the market. Some institutions may have a commercial partnership with InfoChoice. Rates are provided by partners and taken from financial institutions websites. We believe all information to be accurate on the date published. InfoChoice strives to update and keep information as accurate as possible.
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