If you’re switching your home loan to a new lender, you may be charged an up-front sum in the form of an application fee. This could be a set fee or a negotiated amount. Some lenders may waive the fee altogether or include a home valuation (see below) in the application cost.
Home values change constantly according to factors like the state of the market and the sale price of surrounding homes. During a refinance, your lender could charge you to cover the cost of obtaining an up-to-date valuation on your property.
A professional valuation will establish your current level of equity and your Loan to Value Ratio (LVR) – the percentage your loan represents against the home’s total value. These are used to determine the terms a lender could offer you.
Lenders Mortgage Insurance
If you’re borrowing more than 80 percent of the value of your new home, many lenders will ask you to pay Lenders Mortgage Insurance (LMI) when you refinance. LMI could apply even if you’ve paid it on your existing loan – it’s there to protect lenders against borrower default and risk.
A current valuation of your home will help you and your lender work out if you have enough equity to switch loans without having to pay the additional cost of LMI.
Break costs on fixed-rate loans
Break costs may apply if you have a fixed-rate home loan and you refinance to another lender before the end of the fixed term. These costs are charged to compensate the bank for any loss of profit that your decision to end the contract may cause.
It’s worth working out how much you would owe in break costs because, even if they apply, you could still end up with a better deal when you take rate savings into account.
A discharge fee (also known as a settlement or termination fee) may be charged to cover the cost of closing your loan.
Completing a loan involves administration and paperwork and some lenders will charge a fee to pay out the existing loan in full and prepare the required documentation.
There may also be various legal costs associated with refinancing.
Settlement fees are often payable to a new lender to cover the costs of arranging for their lawyer to attend the loan settlement.
Mortgage deregistration (or land registration) fees may be charged to remove a loan from your current lender and register it to your new lender.
There’s also your own lawyer or conveyancer who you may use to help you with the home loan paperwork.
Paying a financial adviser
It’s very common to switch lenders or refinance to a better rate without the help of a financial advisor.
On the other hand, if your circumstances are more complicated, or if you’re someone who generally feels more confident seeking a professional perspective before making financial decisions, paying a bit extra to discuss refinancing with an independent advisor could be well worth the investment.
The social cost
There are also costs that can’t be measured purely in dollars and cents.
The effects of choosing a particular lender can be far reaching and you may be one of many Australians interested in how your banking choices contribute to a positive future for people and the planet.
Keen to learn more?
Our home loan refinance calculator helps you work out the potential savings and, from there, it’s easier to factor in the costs. You can also learn more about Bank Australia’s home loans and switching to values-based banking.