The fees and costs of refinancing

The fees and costs of refinancing

Nell Matzen - 8 Dec, 2020

Australia’s record-low interest rates are creeping up in the next couple of months thanks to the introduction of COVID vaccines and the RBA holding the cash rate 0.10%. The good news brought with it a rise in bond yields, and the average interest rate of a 30-year mortgage followed suit. 

The housing finance data from the Australian Bureau of Statistics June quarter revealed that an estimated $40 billion worth of home loans had been refinanced since March. 

For Australians looking to take advantage of record-low interest rates and join the unprecedented refinancing boom of 2020, the slight rise in interest rates has created a sense of urgency. 

Speaking to Market Watch, Chief Economist at Realtor.com Danielle Hale said a vaccine was expected to continue to push rates higher.

“It should push overall interest rates up because it improves prospects for economic growth,” she said. 

Even with the slight rise, Australian’s looking to refinance can still find historically low-interest rates and potentially shave money off their mortgage. Before deciding whether refinancing is the right financial move, it’s essential to understand the associated fees and costs. We’ve compiled a list of every possible dollar and cent you could run into on your refinancing journey. 

What is refinancing?

Refinancing is essentially replacing your old loan with a new, better loan. Through the same mortgage application process, a new loan is taken out to repay your existing loan, either with the same lender or an entirely different one. There are different fees associated with refinancing compared to a regular mortgage, which is dependent on your existing loan, your new loan and your lender. 

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Why do people choose to refinance?

The main reason for refinancing, and the driving force behind the refinancing boom, is to save money by switching to a loan with lower interest rates.

Refinancing is also a common option for homeowners looking for extra funds to finance renovations or access their equity in an emergency.

Mortgage holders can also refinance to consolidate their debt, with their new mortgage absorbing their high-interest personal loans. It’s also possible to save money by switching to a mortgage with a different rate type or loan features and by shortening the life of the loan. 

How much does it cost?

The fees and costs of refinancing vary depending on several factors, including which state or territory you live in, as government fees may still apply. Fees are also dependent on your lender, whether you choose to refinance externally or internally, and the amount of equity in your home. Refinancing involves a legally binding document so remember to factor in legal fees. 

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Discharge fee or termination of mortgage

Commonly known as a settlement or termination fee, a discharge fee covers the lender’s legal costs and is paid when closing down your old loan. The amount can vary greatly, ranging between $75- $600.

Property valuation fee

Getting your property valued is an essential part of the refinancing process. A valuation identifies the equity in your home and helps to determine which loan is right for your financial situation. A valuation needs to be carried out by a certified valuer, which can cost anywhere between $50-$420. Check with your lender if the cost is included in your application fee. 

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Mortgage application fee

Mortgage application fee, start-up or set-up fee, the name and amount varies from lender to lender. You’ll be familiar with a mortgage application fee from when you took out your original mortgage, where you would have paid somewhere between $150-$995. Thankfully, some lenders are kind enough to waive the fee entirely.  

Break cost

Break costs usually apply if you are switching from a fixed-rate loan, reimbursing the lender of any potential losses suffered when you closed down your mortgage. Banks aren’t always forthcoming with their break costs, or how they are calculated, but are usually dependent on your current and new interest rate, the amount you borrowed initially and the remaining balance on your loan. 

Lenders mortgage insurance (LMI)

LMI is used to reduce the financial risk for the lender and still applies to refinancing if you are borrowing more than 80% of the value of your property.

The amount of LMI you will pay will depend on the size of your loan, and the amount will increase the higher the percentage of the loan compared to the value of your property. When refinancing, the equity in your property takes the place of deposit, meaning you usually won’t have to pay LMI.

If you don’t have enough equity in your home, you don’t need to worry about coming up with LMI upfront, as it is usually incorporated into the loan. 

Stamp duty

Stamp duty is a government tax on real estate transactions, and one of the largest fees involved in refinancing. The amount of stamp duty you will be required to pay is dependent on the cost and type of your home, and where you live. You can potentially avoid paying stamp duty if you borrow under the same name, don’t increase the loan amount and choose to refinance internally.  

Click here for the stamp duty costs for each state and territory and check out eChoice’s Stamp Duty Calculator.

Switching fee

Switching fees are incurred when you switch between mortgage products with the same lender. The average cost is $300 but will vary depending on your financial institution. 

Example Page

Settlement fee

A settlement fee can cost anywhere from $15-$650, depending on your lender. The fee goes to your new lender to cover the costs involved with establishing your new loan and closing down your old one. 

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Title insurance

A type of specialised insurance, title insurance covers specific issues that were possibly missed in the conveyancing process, including zoning rights, illegal structures and encroachment. Title insurance varies wildly and can cost you anywhere between $500-$3000. Unfortunately, title insurance is tied to your mortgage, so will be required upon the establishment of your new loan. 

Exit fees

Exit fees only apply to loans predating July 2011. If your mortgage commenced before this date, exit fees are calculated on time left on your loan, your lender and the size of your loan. Luckily, some institutions removed exit fees from all existing loans, and others have been known to waive them – it won’t hurt to ask. 

Mortgage registration fees

A mortgage registration fee is paid to the government to register your property as security for your home loan. The small feel – $116.80 – $187 – allows future buyers to see any claims that have been made on the property. The fee is paid twice – when establishing and discharging your mortgage. 

Example Page

Title search fee

Your lender will conduct a title search to confirm you own the deed to your property. At approximately $30, a title fee search is one of the smallest costs incurred when refinancing a home loan.

Time and effort

Cast your mind back to when you got your original mortgage – do you feel like you could go through that process again? Just like getting any mortgage, refinancing is a complex undertaking, so before you pull the trigger, make sure you’ve got the time and energy to commit to the process.

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Words by Nell Matzen

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