Have you considered refinancing your loan?
Maybe you're wondering how much borrowers need to pay to refinance their home loans?
According to Canstar, the average cost to refinance an owner-occupied home loan in Australia is $803.
This includes fees such as the discharge, application, valuation, documentation, legal and settlement costs.
Canstar pointed out that to recoup the average cost of refinancing within the first 12 months of making the switch to a lower rate on a $500,000 loan, a borrower with an existing average variable rate of 6.98% would need to secure a rate discount of 0.21%.
Making the switch to a rate of 6.77% would cut repayments by $67 per month or a total of $804 in the first year, which is enough to cover the cost of refinancing.
| What Rate do You Need to Cover the Cost of Refinancing? | ||||
| Existing Borrower | Refinance to Cheaper Loan | Difference | ||
|
$500,000 |
Interest Rate | 6.98% | 6.77% | -0.21% |
| Monthly Repayment | $3,528 | $3,461 | -$67 | |
| Total repayments in 1st year | $42,336 | $41,532 | -$804 | |
|
$750,000 |
Interest Rate | 6.98% | 6.83% | -0.15% |
| Monthly Repayment | $5,291 | $5,220 | -$71 | |
| Total repayments in 1st year | $63,492 | 62,700 | -$852 | |
|
$1,000,000 |
Interest Rate | 6.98% | 6.87% | -0.11% |
| Monthly Repayment | $7,055 | $6,985 | -$70 | |
| Total repayments in 1st year | $84,660 | $83,820 | -$840 | |
| Source: www.canstar.com.au - 19/06/2023. Existing borrower rate based on average owner occupier variable home loan on Canstar's database, available for a $500k, 80%LVR, P&I loan; excluding introductory and other special condition loans in April-22 with cash rate increases applied. Scenario assumes a remaining loan term of 25 years. | ||||
Getting a rate discount is key to cutting repayment costs and recouping refinancing fees, says Canstar’s Editor-at-Large and money expert, Effie Zahos.
She further explained:
“If borrowers are spending on average just over $800 per refinance, this means that collectively they could have spent more than $348 million in refinancing fees in one year.
Borrowers have to get enough of a rate discount to make sense of switching. Refinancing doesn’t come for free.
There are costs associated with switching lenders that you need to recoup.
If you don’t secure a discount of at least 0.21 percentage points it’s not worth the hassle and paperwork.
The aim of the course is to try and always secure the lowest possible rate.
In a rising interest rate market, there’s no guarantee that the lender you move to will always maintain that interest rate discount.
Once you secure a lower rate and make the switch, be careful not to extend your loan back to the full 30-year term when refinancing.
While this will lower repayments even further, it takes longer to repay the loan and will see you pay more interest in the long run.”
If you borrowed more than 80% of your property's value, recovering the refinancing costs within the first year might be challenging.
Let's say you have a loan-to-value ratio of 90% on a $500,000 loan and you've also paid for Lenders Mortgage Insurance (LMI).
To recoup both the cost of refinancing and LMI in the first year, you would need to secure a rate discount of 3.24%.
This would bring your interest rate down from 6.98% to 3.74%.
However, it's important to note that such a low-interest rate isn't currently available in the market, with the lowest rate listed on Canstar.com.au being 4.94%.
Zahos commented:
“Unfortunately a breakeven analysis for homeowners whose loan is over 80 per cent of the value of their property would more than likely show that the costs outweigh the benefits of refinancing.
If you’re unable to avoid paying LMI when refinancing, your best option may be to negotiate a better rate with your existing lender.”
Average cost to refinance a home loan according to Canstar’s research
| Cost to Refinance a Home Loan | ||
| Fee Type | Average | % of Loans that Charge This Fee |
| Discharge Fee | $331 | 95% |
| Application Fee | $495 | 43% |
| Valuation Fee* | $254 | 19% |
| Documentation Fee* | $316 | 7% |
| Legal Fee* | $336 | 25% |
| Settlement Fee* | $246 | 43% |
| Average total cost to refinance: $803^ | ||
| Source: www.canstar.com.au - 27/06/2023. Based on owner occupier variable loans rated in Canstar’s June 2023 Home Loan Star Ratings in the $500,000 loan amount and P&I profile. *Valuation, Legal, Documentation and Settlement fees are often calculated at cost; the values in this table are based only on lenders that advertise a fixed value. ^Average total cost to refinance based on finding each loan’s cost to refinance and then averaging. | ||
