Watch out for the costs of refinancing your mortgage to get the most out of switching
Although refinancing to a new lender can lead to significant cost savings, you need to ensure that you're fully aware of the costs involved.
While you may have found a new lender with a more competitive rate, minimal ongoing costs or better features compared to your existing mortgage, refinancing can be an expensive process. Before you transfer your home loan, do your research to make sure you're actually coming out ahead.
The costs of switching mortgages
- 1. Lenders Mortgage Insurance (LMI). When you switch financial institutions, the new lender may require a new property valuation. If your new valuation is lower than planned, you may be required to pay mortgage insurance. To avoid this, your loan amount must not be higher than 80% of the new valuation. If not, you could potentially be adding a significant amount of money to the cost of your loan. Ask your mortgage broker for an upfront valuation before proceeding with your refinance application to ensure that your current valuation is on track.
- 2. Mortgage Discharge Fees. Don’t confuse these with exit fees. Check your loan agreement to see if your lender charges a discharge fee when you close your home loan account. This could range from $150- $500. With government charges, expect to pay around $1,000 in total. It's always worth talking to your lender to look for cost reductions when discharging your mortgage.
- 3. Break Costs on Fixed Rate Loans. When you break a fixed-term loan, your financial institution will charge you for not fulfilling the agreed terms. The amount you pay will vary according to the interest rate your fixed loan was secured under, the current interest rate and the duration of your loan. Charges can often run in the thousands if poorly managed.
- 4. Switching fees. This is a fee you may have to pay when refinancing internally (staying with your current lender but switching to a different mortgage product).
- 5. Direct Debits. One of the biggest difficulties in switching lenders is managing direct debits from your nominated account. If not done well, you could be hit for “over the limit” and cheque dishonor fees. It can be time-consuming to not only change your main account and mortgage, but also update details with other institutions that access your accounts for regular payments.
- 6. New Application Fees. Your new mortgage will incur upfront application fees and mortgage registration fees which you need to take into account. Application fees typically range from $400 to $750 and mortgage registration varies per state, starting at $100 to $140.
- 7. Stamp Duty. You may be liable to pay stamp duty when refinancing. Expect to pay around 0.35% of the loan value plus GST. To get an estimate you can use our stamp duty calculator.
Refinancing costs estimate
To give you a clearer example of the costs above, we've broken down an example estimate of the fees you may face when refinancing your mortgage. Note that some of these fees can vary from one lender to another.
|Mortgage deregistration fee||$120 (varies according to state)|
|Mortgage registration fees||$120 (varies according to state)|
|Bank valuation fee||$220|
|Title search fee||$30|
|Preparation of mortgage documents||$100|
|Total refinancing costs:||$1,325|
Switching costs for 9 popular loans
|Product||Switching fee||Discharge fee||Legal fee||Valuation fee||Settlement fee||Total|
|UBank UHomeLoan Variable Rate - Discount offer for Owner Occupiers, P&I Borrowing over $200,000||N/A||N/A||N/A||N/A||N/A||$0|
|loans.com.au Essentials - Variable (Owner Occupier, P&I)||$260||$300||N/A||$220||$300||$1,080|
|Tic:Toc Live in Loan Variable Rate - Principal & Interest||N/A||$325||N/A||N/A||N/A||$325|
|ME Flexible Home Loan With Member Package - LVR <=80% $400k up to $699,999 (Owner Occupier, P&I)||N/A||$300||N/A||$200||N/A||$500|
|Yellow Brick Road Rate Smasher Home Loan||N/A||$400||$330||N/A||N/A||$730|
|Newcastle Permanent Building Society Premium Plus Package Home Loan - New Customer Offer ($150k+ Owner Occupier, P&I) Discount 1||N/A||N/A||N/A||N/A||N/A||$0|
|Macquarie Bank Basic Home Loan - LVR up to 70% (Owner Occupier, P&I)||$250||$400||$330 +GST||At cost above $300||N/A||$1,280|
|Virgin Reward Me Variable Home Loan - LVR <= 80% ($750k+ Owner Occupier, P&I)||N/A||$320||N/A||N/A||N/A||$320|
|CUA Balanced Variable Home Loan - New Lending only (Owner Occupier, P&I)||N/A||$500||N/A||N/A||$195||$695|
If you're interested in switching to a cheaper or better home loan, then start comparing your options in the table below.
Refinancing Home Loan Comparison
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