Is there a cost to refinance your home loan (and how much could you save)?

Some of the fees and charges you can expect to pay when you refinance a home loan include:

Discharge fee: $100-$400 (average $318 in July 2023)

The lender you are leaving may charge this fee when you leave them. A discharge fee covers the admin costs of wrapping up your home loan, and is different to an exit fee, as exit fees were banned in 2011. 

Break fee (for fixed loans): Will vary depending on how much variable rates have changed

Refinancing a home loan while there’s still time left to run on the fixed-rate term could potentially cost you a lot of money. The lender you’re leaving may charge a break fee to help make up for the interest charges they had previously budgeted for.   

Set up fees: $300-$1000 (average $544 in July 2023)

Your new lender may charge an initial upfront fee to help cover the admin cost of setting up your new home loan. Some lenders may choose to waive these fees to help attract your business.

Lenders Mortgage Insurance (LMI): Will vary depending on the borrower's circumstances, but can range from thousands to tens of thousands of dollars.

Refinancing a home loan with less than 20% equity in a property will likely mean having to pay for LMI to cover the lender’s financial risk in case you default. The lower your equity, the more the LMI may cost. You can get an idea of your current equity by getting a free property report and comparing your home’s estimated value to what’s owing on your mortgage.

Lender’s title insurance: $300-$2000 (for Fast Track applications, varies depending on property value and location)

A Fast Track refinance could potentially see your home loan switched to a new lender in just a few days, rather than a standard refinancing time of 21 to 30 days. You’ll have to work out whether the benefits of starting to save with your new loan sooner will be worth the extra cost of fast-tracking your refinance application.

You may find that you don’t need to pay all of the expected costs when you refinance. For example, some lenders may be willing to discount or cut their upfront fee when you apply for a home loan. A few may also offer discounted or waived LMI if you have more than a minimum amount of equity in the property. Contacting a lender to negotiate could net you a better deal, as lenders may be willing to be flexible about their interest rates or fees to win your business as a customer.

Another method to offset the cost of refinancing is to look for a home loan from a lender that offers cashback for refinancers. These offers may be worth a few thousand dollars, which can make a big difference to your refinancing budget. As well as cashback, a few lenders may offer alternative sign-up bonuses when you become a customer, such as bonus frequent flyer rewards. But keep in mind that not all banks or mortgage lenders will be willing to offer a cashback deal to attract your business, so you may have fewer home loan options to compare.

There are several ways that you could potentially find yourself financially better off by refinancing, such as:

Getting a lower interest rate

Switching to a lender that offers a lower interest rate could potentially help you pay less on your home loan, both from month to month and over the lifetime of the loan. For example, if someone with a $500,000 debt today and 25 years remaining on their loan refinanced from an interest rate of 6.36% to 5.00%, they could save up to $409 in the first month, and up to $4908 over the first year.

Source: RateCity.com.au. Does not account for fees or interest rate changes over time.

Keep in mind that refinancing to a longer loan term could let you enjoy lower home loan repayments in the short term, but you may end up paying more interest on the property in total over the longer term.

Paying fewer fees

By switching lenders, you may be able to pay less in fees, including monthly service fees, annual fees, extra repayment fees, late payment fees and redraw fees.

To get a better idea of exactly how much you could save, compare the fees that your current lender is charging to what the new lender is offering.

Accessing useful features

Your new home loan may offer the ability to make extra repayments, or access to an offset account, both of which can help you pay less total interest on your home loan over time. A redraw facility may also be available to access your extra repayments again if required.