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How much does it cost to refinance?

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Refinancing can be a smart way for homeowners to reduce monthly home loan repayments or pay off their loan faster. But what are the costs of refinancing?

If you want to refinance your home loan, there can be some costs and fees involved. How much these costs and charges add up to can determine whether it makes financial sense to refinance in the first place. To make sure you’re not caught off guard with hidden fees and charges, we’ve listed all of the upfront costs to look out for when refinancing.

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1. Break costs - If you are breaking from a fixed rate

If you are currently on a fixed rate loan, you may also find yourself expected to pay additional break fees. However, this will depend on how far you are into your home loan, along with the size of the loan.

Break costs are incurred by buyers if they repay their home loan before the end of the fixed period. Break costs are charged because the lender will make a financial loss if a borrower breaks a fixed term loan.

When a borrower breaks a fixed term the lender will then need to on-sell these funds at a potentially lower interest rate. The cost of on-selling plus the difference in interest rate typically results in a financial loss to the lender. They recoup this loss by calculating the amount lost and charging it to the borrower.

How are break costs calculated?

Break costs are calculated based on the length of time remaining on the fixed term, and the difference in the lender’s cost of funds at the time of breaking in comparison to when the fixed term was initially taken. If the lender’s cost of funds has increased this could mean that there is no break cost.

2. Application or establishment fees

An application or establishment fee is cost that some, but not all, lenders charge for when a borrower applies or sets up a loan.

Whiles the price can vary from lender to lender, it can range from $0 - $1,000.

Additionally, there might be extra costs and charges for preparing and registering a home loan with the lender. These might include the valuation fee and survey report as well as the lender's own legal fees.

Refinancing fees and costs are not always set in stone. If you’re in a good position your Home Loan Specialist or mortgage broker can negotiate these fees for you so that you might not need to pay them at all.

One cost you won’t have to worry about when refinancing is exit fees. Exit fees were banned from all home loan contracts that were signed after July 1, 2011. If your home loan contract was signed before July 1 2011, you may still incur exit fees.

A Home Loan Specialist can help you work out which is the best financial option for your needs.

3. Lenders Mortgage Insurance (LMI)

If your equity is less than 20% of the property's value or your Loan to Value Ratio (LVR) is above 80%, you may be required to pay LMI. It's important to remember that this insurance only protects the lender in case you fail to make your home loan repayments.

The cost of LMI can amount to 1-3% of the home’s value but keep in mind, it does not go towards repaying the home loan principal. It is typically paid on top of your monthly repayments to your lender.

Use our calculator to find out how much you might pay in LMI fees.

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4. Property valuation fees

Each time you refinance lenders will request a valuation of the property to assess whether it has increased or decreased in value.

Depending on your lender, the fee can vary from $100 to $600, while some may waive the fee altogether.

You can also opt to evaluate your property through an independent valuer, although they may charge up to $400 and over.

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5. Discharge fees

Discharge fees are incurred when buyers pay out their home loan or when they refinance. Discharge fees cover the administration and legal fees of new documentation.

For buyers that opt out of a fixed rate home loan early, they are charged an early discharge fee, or break fees, in order to account for both the legal expenses and interest repayments.

Depending on your lender, these fees could range from $150 to $500, so it’s a good idea to check whether your lender charges discharge fees before opting to refinance. Our Home Loan Specialists can help you with this.

6. Lender legal fees

Some lenders will charge back the legal costs involved in settling a loan to borrowers. Typically, this is included in the discharge fee, however, some lenders may opt to charge legal fees separately.

Additionally, buyers may employ solicitors or conveyancers during the refinancing period which will incur legal fees for the buyer.

7. Stamp duty and government fees

This isn't common, but depending on how you choose to refinance (and the state or territory that you live in), you may or may not be subjected to stamp duty fees.

If you choose to refinance your home loan for an amount that is larger than the original principal, you are liable to stamp duty fees. The cost of these fees are only applied to the difference between the original and new amount.

Stamp duty fees are also applicable when the borrowing entity of the loan is changed. In simple terms, stamp duty applies to buyers when the loan amount is increased and/or the name of the borrower is changed.

State governments may also charge a mortgage registration fee when buyers opt to refinance with a new lender. This fee is typically charged once to release the first lender, and then once again when registering for a new lender.

The laws regarding stamp duty and mortgage registration fees vary between states when refinancing, so double check with your conveyancer.

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8. Loan features you might be charged for:

When refinancing, buyers are provided with the opportunity to introduce features such as redraw facilities or offset accounts as part of their new home loan. These features can come with ongoing fees and charges you should be aware of.

Redraw facilities:

Redraw facilities essentially allow buyers to make extra repayments on their home loan, while retaining the ability to ‘redraw’ on their extra repayments should they need to. While this does provide benefits for buyers, some lenders may charge a fee when buyers choose to ‘redraw’.

The fee is typically charged differently between lenders, with some requiring buyers to redraw a minimum amount. Some lenders may provide buyers with a number of ‘free redraws’ before they have to pay, while some may not charge at all.

Lenders have different policies and fees regarding their redraw facilities so make sure you shop around to find out what redraw policies work for you.

Offset accounts:

Offset accounts are transaction or savings accounts that allocate funds towards your home loan. The amount present in an offset account counts towards the home loan and reduces the interest that buyers pay on their home loan.

For instance, a buyer that is paying off a home loan valued at $500,000 deposits $40,000 into an offset account. This means that the principal amount is reduced to $460,000 and interest is only charged on this amount. The funds in this account can be used anytime for transactions or withdrawn. However, this will affect the amount that counts towards your home loan.

Some lenders may charge an annual or even monthly fee for offset accounts that can add up to around $500 a year. Check with your lender to make sure that the amount you are saving in interest is greater than the offset account fees.

Credit cards

Some lenders may even provide borrowers with a credit card as part of their new loan package. However, keep in mind that this can often incur ongoing monthly or annual cost, and using a credit card only adds to your debt.

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So there you have it, a breakdown of the potential costs of refinancing. If you’re thinking of switching your home loan, it’s important to make sure you read all terms and conditions, and ensure that your new loan aligns with your financial objectives. Our experts can help you work out if refinancing is right for you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: interest rate, refinance, borrowing costs, extra repayments, low interest, lmi (lenders mortgage insurance), stamp duty, application fee, discharge fees, switching fee

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