What does it cost to refinance a home loan?

Paying too much for your mortgage? One thing you can do to reduce costs is refinance your home loan, as this can give you access to lower interest rates and better features.

Refinancing is the process of switching from one mortgage to another, either by negotiating with your current lender or switching to a new mortgage provider.

Refinancing your home loan can save you money in the long run, but you’ll have to pay various fees just to kick off the process. Here’s a list of costs involved with refinancing.

Discharge fee

A discharge fee is charged by your current lender to cover the administration cost of closing your home loan.

Your lender may also refer to it as a settlement, termination or exit fee in its home loan documentation.

Discharge fees range from $0 up to $696† among the banks and lenders we track in the Mozo database, with an average cost of $325†.

Fixed rate break fee

If you currently have a fixed rate home loan, there’s a good chance you’ll have to pay a break fee.

This is because lenders borrow from wholesale money markets to fund the loans they issue, and when you sign up for a fixed rate home loan the bank fixes its costs to hedge against any interest rate movements.

Therefore, if you want to refinance and end your fixed rate home loan early, your lender still has to repay the loans it took out at the same rate until the end of the agreed period.

This can come at a significant cost to your lender if interest rates have changed, and it will pass this cost onto you in the form of a break fee.

Break fees will vary depending on your outstanding balance, the interest rate and how much longer is left on your fixed rate term.

The exact amount is difficult to estimate, so it’s worth getting in contact with your lender to get a clearer idea.

Application fee or establishment fee

An application fee or establishment fee is a one-off payment your new lender will charge to set up your home loan.

Application fees are usually payable on home loan settlement, which is the day that your new home loan comes into effect.

The application or establishment fee ranges from $0 to $600† among the variable rate home loans tracked in the Mozo database – and it’s worth noting that some application fees include a property valuation fee.

Overall, the average refinancing cost of application fees in Mozo’s database is $172†.

Property valuation fee

Your new lender will arrange a property valuation to determine your home’s market value.

A property valuation helps the lender understand your current home equity and whether your home’s value is enough to cover the cost if your mortgage defaults and it needs to repossess the property.

A licensed valuer will take into account the location of your property, its size and condition, the number of rooms it has, its additional features and other aspects.

Mortgage registration fee

The mortgage registration fee is a government charge, and it pays for your lender to register your mortgage onto the title record for the property in the relevant state or territory.

It pays this fee to the relevant authority on two occasions – once when the mortgage is established and again when it is discharged. The cost of mortgage registration will vary across states and territories.

Rate lock fees

If you apply for a fixed rate home loan, your new lender will give you the option to lock in the interest rate that is quoted at the time your loan is approved.

This is offered as protection against any interest rate hikes your lender might make in the period between home loan approval and settlement.

Just make sure you have a clear understanding of where home loan interest rates are heading to determine whether a rate lock is necessary in the first place, as lenders can charge a fee that is a percentage of the loan amount, or a flat fee of up to $750†.

What’s more, if you opt for a rate lock and interest rates drop during this period, you might be stuck paying a higher rate.

Lenders mortgage insurance (LMI) protects the lender from financial loss if you are unable to make repayments on your home loan.

You’re required to pay lenders mortgage insurance when your first deposit is less than 20% of the home’s value, or in other words, your loan-to-value ratio (LVR) is 80% or higher.

Lenders mortgage insurance isn’t transferable, so you’ll want to know what your loan-to-value ratio is before you refinance.

If you originally took out your home loan with a high LVR of 90% or more and you haven’t managed to bring it below 80% during the time you’ve held your current mortgage, it’s likely you’ll wind up paying the insurance again when you refinance.

Some lenders might be willing to offer you a refund of some kind, so be sure to discuss your options with your current lender.

You should be aware of any cost that your new lender will charge over the life of the home loan. These might include:

• Monthly or annual service fees: these cover the cost of managing your home loan over time.
• Extra repayment fee: some lenders can penalise you for making too many extra repayments in a year, especially on fixed rate home loans.
• Redraw fee: some lenders will charge you each time you use a redraw facility.
• Late payment fee: can be charged if you don’t make a repayment on the due date.

There are pros and cons of refinancing your home loan, and one of the drawbacks can be the costs involved. Weigh up the benefits and drawbacks of refinancing before making your final decision, to see if you can save money in the longer term.

† Source: mozo.com.au as of 18 July 2024, all application and discharge fees for all home loans. For rate lock: Based on Mozo analysis on Big 4 banks as at 18 July 2024.