Costs of Refinancing a Loan

What are the costs of changing from one loan to another?

Costs to refinance can range from minimal to thousands of dollars, depending on the circumstances surrounding your change. Because of the different lender products and individual circumstances, there is no straight forward formula to answer this question. You simply have to go through your options and work it out. Once you have done that, you will have a very precise and quantified understanding of your refinancing costs and options. If you work thought this page, you will find that it really is very straightforward.

Typical Set-Up fees

You will recognise many of the entry costs of refinancing because they are pretty much the same ones you paid when you got the mortgage you have now. One of the things you may not recognise is how fiercely lenders are now competing for your business. You may well be surprised at how many fees are waived by the lender you are planning to go with. There are some fees like state government charges that must be paid, no matter how much a lender wants your business. Typical set-up fees:

> Mortgage Stamp Duty: This may or may not have to be paid again, but you could have to pay up-front and have your lender apply for a refund on your behalf. In most cases you have to pay the stamp duty again, unless everything is the same, i.e. the same names and the same security property. Mortgage Stamp Duty is not applicable in Victoria, ACT and NT

> Application Fees: Not all loans have application fees and even those that do often have promotions which waive the fee. Make sure you check

> Document Preparation, Settlement and Legal Fees: Dependent upon how this function is performed, some lenders charge and some do not

> Valuation Fees: These fees depend on the lender and, sometimes the value of the property. In many cases, if there is only one property involved, there may be no valuation fee. Make sure you check

Typical Exit fees

The bottom line is that apart from discharge fees (around $50-$200), some loans have exit penalties, early repayment fees or deferred loan establishment fees. These may not be high but, if you have a loan which initially offered some kind of up-front rate discount or very low interest rate, you will almost certainly be up for these fees and they can amount to thousands of dollars. 

"We take this opportunity to thank Eddie Dubash for arranging a re-finance of our current home loan and consolidating our personal debts and saving us several thousand dollars over the life of our loan.  If anyone needs finance rest assured we will be sending them your way for sure." F & G Nammour, Bella Vista

Exit fee scenarios

As noted, apart from discharge fees, invariably, but not always, there will usually be some kind of exit fees attached to the existing loan. Here are some common scenarios:

• What kind of loan do you have and where you are you up to in the term of the loan (say you are 9 months into a 12-month fixed rate or introduction rate loan). Exiting fixed-rate loans mid-term could attract relatively higher fees than exiting, say, a variable rate loan
• Which lender is the loan with? Different lenders' products and different policies on exit fees means that these amounts can vary substantially
• Size of the loan? Fees might also depend on the size of your current and new loan(s)
• Switching loans versus changing lenders. Are you staying with the same lender and just switching from one loan product to another, or are you leaving your current lender? If you are staying put, fees will probably be lower

You will probably pay more interest if you stretch your loan term

One of the things to think carefully about if you are refinancing to stretch out your loan term is the extra interest which you will pay for taking longer to pay off the loan. For most people, most of the time, the cheapest loan is the one you pay off fastest. Make sure you run through the scenarios with your mortgage broker. 

Should I Refinance?

Refinancing can be expensive so make sure you have carefully analysed your situation with your mortgage broker first. One of the worst things tyou can do in this current climate is to be overly influenced by the commentary in media which is often distorted and ill informed.  Basic maths is still the best guide as to whether a move to another lender is worth the expense.

Here is an example of a typical scenario where someone might think they should refinance. You have a $300,000 self-employed pro-pack loan at 8.72% interest.  You know that one of the major banks offers the same low-doc loan at 8.27% interest. That sounds like a big difference, but the actual rate differential is approximately $1,350 per annum. In year one, your current lender will charge an exit fee of $6,600. In years 2 and 3, the exit fee is $4,500 and years 4 and 5, the exit fee is $3,600. The cost of exit versus what you would save by changing clearly shows that the move is simply not worth if your term so far is less than 5 years. 

Do the Sums Yourself

Assess your situation confidentially with a professional

If you are concerned or not sure, the first thing to do is assess your options thoroughly with someone who understands your situation. Talk to your accountant, then talk to your local mortgage broker. A good mortgage broker will have loans assessment software and they will be able to use their technology to do the sums for you.