How much does it cost to refinance a home loan?

Do you have a mortgage? Would you like to realise a lower interest rate, access additional home loan features, or consolidate consumer debt? Then refinancing your home loan might be an option for you! 

Refinancing means to switch from one home loan product to another, whether with the same lender or a new one. But before you dive headfirst into the process, it's crucial to understand the costs involved.

How much does it cost to refinance a home loan?

Before refinancing, it's important to review whether the long-term savings will outweigh the upfront costs.

These costs come in numerous forms – application fees, valuation fees, discharge fees, and break fees, to name a few. Some are far more significant than others. Though, many can be offset by incentives, like cashback offers, and others might be negotiable. You might ask whether your new lender would consider waiving any valuation or establishment fees, for instance – the worst it can say is 'no', after all!

Costs can also vary depending on whether you're refinancing internally (switching to a new product with the same lender) or externally (moving your loan to a new lender entirely).

Fees you might need to pay when refinancing

While the cost of refinancing a home loan varies, you can estimate how much you would need to pay by adding up the common costs associated with the process:

Fee	Description	Estimated amount
Application fee	Charged by the new lender to process your application.	$200 - $1,000
Valuation fee	Property valuation to assess market value.	$300 - $500
Establishment fee	Charged by the new lender to establish your mortgage.	$300 - $600
Discharge fee	Charged by your old lender to close your existing loan.	$150 - $400
Break fees for fixed rate loans	Penalty for breaking a fixed rate loan early.	Varies based on loan amount and fixed term
Lenders Mortgage Insurance (LMI)	Insurance to protect your lender in case you default on your loan.	Varies depending on how much equity you have

The above amounts are only an estimate and can vary between lenders and products. Many home loan lenders provide a detailed breakdown of the costs you might pay when you refinance to or from them on their website, or you can ask your lender or mortgage broker for a quote.

Is it cheaper to refinance internally or externally?

After you've decided you need a more suitable (or a cheaper) home loan deal, the next question you might ask is whether or not you should switch lenders. Most home loan lenders offer multiple different products. Some even offer dozens! Typical options include:

• Variable rate home loans
• Fixed rate home loans
• Home loans with offset accounts
• Package deals, with extras like fee-free credit cards and offset accounts

The case for internal refinancing

If you're simply wanting to switch from home loan product to another, it might make sense to stay with your current lender. Doing so can allow you to bypass certain refinancing fees and you might be able to barter down other costs, as your lender will likely want to keep your business.

The argument for external refinancing

However, there is such thing as the 'loyalty tax'. Lenders tend to offer their lowest rates to new customers – that means moving your home loan to a new lender might see you getting a better deal.

The verdict

It's a good idea to crunch the numbers before deciding whether to refinance with your current lender or switch to a new one. Which option is cheaper will depend on your personal situation and market conditions at the time.

Either way, it's worth asking your lender if it can offer a better deal before you commit to refinancing. It might be willing to match your needs in order to keep your mortgage on its books.

When is the cost of refinancing not worth it?

Chances are, it will take some time to recoup the costs of refinancing through realised savings. As a rule of thumb, if you can't recoup your outlay within 12 months, it's probably worth waiting for a better deal to come along.

There is one major factor a borrower should consider before refinancing, however. If you have a fixed rate, your refinancing journey could look markedly different to that of a variable rate borrower.

Fixed rate borrowers: Beware of break fees

If you have a fixed rate home loan and you're looking to refinance, you might incur a break fee. These fees cover any loss of profit the lender may realise due to you backing out before the end of the agreed fixed term.

Break costs are quite difficult to calculate, but they typically depend on three factors:

1. The loan's principal balance

2. The length of time remaining on the fixed term

3. The fixed rate compared to market variable rates

Break fees can come in at thousands of dollars, or even tens of thousands. Though, there are cases in which they don't apply at all. If you have a fixed rate and you're considering refinancing, it's worth asking your lender whether you might be up for break fees.

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Important Information and Comparison Rate Warning

_{Originally written by Gerv Tacadena.}

_{Image by kstudio on Freepik}