How much does it cost to refinance?

While there are a range of benefits to refinancing a home loan, it’s crucial to be realistic about the costs that could be involved.

These costs can often be recouped from the interest savings on your home loan in a matter of months, but it is important to be aware of what you will be expected to pay upfront, so you can budget for it. The more information you have, the less likely you will be surprised by an unexpected expense down the track.

When you look into refinancing, the most obvious costs you will notice are the fees, charged by both your old lender and your new lender. 

The first of these fees will be a discharge fee, charged by your old lender to cover the cost of the paperwork involved in closing your loan. This fee will generally cost between $100 and $400 (average $321 in April 2023). 

If you currently hold a fixed rate loan, you may be required to pay an additional break free for ending your loan during the fixed rate period. You will need to check with your existing lender if this fee applies and how much it will be, as it is based on how much variable rates have shifted since you first took out your loan.

Your new lender may then charge upfront or setup fees. This could be a combination of an establishment fee, valuation fee and settlement costs. Depending on how much each fee costs, your total set up expenses could be between $300 and $1000 (average $552 in April 2023). A standard valuation fee alone can be between $100 and $500. 

You have the choice to pay your home loan’s switching fees upfront, or to add them to your new loan. While this second option could save you some money upfront, it also means being charged interest on these fees over the life of the loan, which could cost you thousands of dollars more in total.

Refinancing is likely to come with added expenses, but the upside is that it can also save you money in the long term. The point where the amount you have saved on reduced repayments and ongoing fees cancels out the amount you paid to refinance is referred to as your break-even point. For most people, this point can be reached in a matter of months. 

You can find your break-even point by using a refinancing calculator to estimate your savings per month from switching home loans, then comparing this to your total switching costs.  

If you are refinancing to a larger loan, or you have not yet built up 20% equity in your property, you may have to pay Lender’s Mortgage Insurance (LMI) when you refinance. This insurance policy covers the lender (not you) if you default on your mortgage repayments. This could potentially add thousands to your refinancing bill so it should be on your radar early on.

If you choose to refinance using a Fast Track refinance process, you may be asked to pay title insurance to cover the lender for the period before your property’s title is officially transferred. This can cost between $300 and $2000 depending on your property’s value and location, though some lenders may offer to cover the cost to attract your business.

While at first glance, the long list of potential refinancing fees may seem like a big financial burden, you should keep in mind that many lenders are willing to negotiate to earn your business. For example, they may offer to discount your upfront fees or cover your discharge fee to encourage you to switch.

Even if these offers aren’t made up front, you can still negotiate with a potential lender to reduce the fees you need to pay. Doing your market research and knowing which lenders are offering which deals may give you some leverage to negotiate with your preferred lender.

If you need more refinancing tips or assistance taking care of your home loan application, you could consider contacting a mortgage broker.