Are there fees for switching home loans?

Australian borrowers wanting a better home loan rate may be tempted to refinance their mortgage and switch to an offer from a competitor lender. But before you jump ship, make sure you check the fees, charges, and other costs that may be involved.

What are the fees and charges when switching home loans?

Some of the fees you may pay when refinancing include: 

• Mortgage discharge fees (average $315): Covers the admin cost of closing your current mortgage with your existing lender
• Break costs (varies, can be thousands of dollars): If you refinance a fixed rate home loan during the fixed rate term, you may be charged break fees. The amount you’ll be charged may depend on how much longer was left to run on the fixed rate term, as well as how much interest rates have changed since you first took out the loan. 
• Application and settlement fees (average $584): Covers the admin costs of setting up and settling your new home loan with your new lender. 
• Switching fee (approx. $250 - $650): Charged if you’re refinancing internally with the same mortgage lender. 
• Title search fee (approx. $30 - $50): To confirm that you are the legal owner of the property and there are no irregularities with the title. 

Some of the charges and other costs you could also end up paying when refinancing include:

• Mortgage registration/deregistration fees (varies by state, approx. $100 - $200 each): Paid to the government to cover the admin costs of switching your mortgage registration between lenders
• Bank valuation fee (approx. $200 - $600): Refinancing your home loan may require a professional valuation from a third party, who may charge a fee for their services. 
• Legal fees: If you engage a solicitor or conveyancer to manage the legalities of your refinance, reviewing the documents involved, you’ll need to budget for their fees. These could include a title search fee and a fee for the preparation of mortgage documents.

What about exit fees?

Exit fees, sometimes called deferred establishment fees, were penalties enforced on borrowers who cancelled their home loans before the agreed contract period. 

In July 2011 the Australian government abolished deferred establishment fees, which may have been charged at a fixed rate or calculated on the percentage of the total home loan balance outstanding. However, if you signed up for your home loan before the regulatory changes in July 2011 the exit fees may still apply. 

Exit fees are not the same as discharge fees, which are required to only cover the admin costs of a lender discharging a home loan. 

Lender’s Mortgage Insurance (LMI)

If you choose to refinance your mortgage when you hold less than 20 per cent equity in your property, you may be charged LMI to help cover the lender’s risk (not the borrower’s) in case you default on your repayments. The less equity you have available, the more you may be charged for LMI.  

Even if you’ve already paid LMI in the past, such as if you applied for your first home with a low deposit, you’ll still have to pay for LMI if you refinance with low equity, as LMI is not typically transferable. 

Calculating your break-even point

If you’re not sure if refinancing will be worth the cost, you could consider calculating your break-even point. This is where the savings on your new loan, thanks to lower interest rates and fees, makes up for the fees and charges you pay when switching.  

Using a switch and save calculator, you can estimate the new repayments on your refinanced home loan, and compare these back to your original repayments to calculate your potential savings. From these results, you can estimate how many months of repayments it may take before the interest savings makes up for the fees and charges. 

Keep in mind that there may also be other factors that could affect the value of a new home loan. For example, some lenders offer cashback rewards to new customers, which could go a long way towards making up for any switching costs. Also, your new lender may choose to discount or waive some of its fees to help get you on board as a new customer. 

What could stop you from switching? 

Some lenders are willing to make special offers to retain the business of their customers, rather than see them jump ship and refinance with another lender. 

For example, some mortgage lenders have introduced loyalty discount programs, which offer lower interest rates for customers who have been with them for over a certain period of time.

Even if your lender doesn’t offer a loyalty program, before you refinance you may want to think about calling your current lender and asking if they’re willing to offer you a discount, such as lowering your interest rate to match what they charge new customers. You may be surprised by how far some lenders may be willing to go to keep a customer. 

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