What is an early repayment fee?

It’s no secret that purchasing a home and taking out a mortgage is a costly experience, so you want to ensure you’re across all potential costs before you sign on the dotted line.

Early repayment fees may be a thing of the past for variable rate home loan customers, but that doesn’t mean your lender still can’t sting you with other ongoing costs. It's crucial to be aware of the terms and conditions, as well as any ongoing fees, associated with your home loan. 

What are early repayment fees? 

An early repayment fee, or early termination fee, was a type of fee that used to be charged to variable rate residential home loan customers who tried to refinance or terminate their loan within a specified period (i.e. three to five years). 

From 1 July 2011, the National Consumer Credit Protection Regulations 2010 (National Credit Regulations) prohibited early repayment fees, as they were considered to limit customers from refinancing, or prevent customers from switching from uncompetitive interest rates. 

When early repayment fees were still prevalent, the average fee charged on a $250,000 variable rate loan from a large bank was $1,081.25. Understandably, this upfront cost would be a barrier for many considering refinancing - especially when you’re likely paying other switching fees, like application fees.

Source: ASIC Regulation Impact Statement

Are there still fees for refinancing a home loan?

It’s worth noting that there are still a range of fees associated with refinancing your home loan. In fact, refinancing your home loan may still cost you on average a few hundred dollars. However, oftentimes your new lender will waive switching fees if you ask to encourage you to join with them. 

That being said, these are some of the fees associated with refinancing your home loan.

Break fee

While you may not be charged for leaving a variable rate home loan anymore, you can still be hit with a break fee if you exit your fixed rate period early. The amount you may be charged is not a set dollar amount, but instead calculated against the remaining fixed rate term and how much interest rates have changed since you first took out the loan. 

Mortgage discharge fee

Some Australian lenders may charge you a discharge fee when you switch home loans. This fee covers the administrative costs of closing your current mortgage. However, there are many lenders that don’t charge this fee, so it’s worth keeping this in mind when you compare your options.

Application fees

Your new lender may charge you an application fee when you sign up for your refinancing home loan to cover the cost of setting up your new account.

Settlement fees

Just as you did with your original lender, you may also be charged a fee for settling your new home loan with your new lender. 

Title search fee

Some lenders may charge you a title search fee. This is done to confirm you are the legal owner of the property, such as through the NSW Land Registry Services.

Valuation fee

Most lenders will request a valuation of your property when you apply to refinance. You may choose to have a home valuation performed by a professional of your choice, and they may charge you a fee for this service.

Lenders Mortgage Insurance

It’s worth keeping in mind that if your equity has not decreased your loan-to-value ratio (LVR) below 80% in the time you have been paying off your mortgage, you may need to pay costly lenders mortgage insurance (LMI). This insurance can cost tens of thousands of dollars, depending on the property value. 

Refinancing a home loan may offer a range of benefits, from nabbing a lower-rate home loan to getting access to helpful features. But it is important to be aware of any potential fees and ongoing costs involved. This may help you to make a more informed decision around the actual cost of your mortgage, allowing you to better prepare your household budget. 

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