What does refinancing actually cost (and when is it worth it)?

Every article about refinancing tells you how much you could save. Almost none of them tell you what it costs to get there, and that missing half of the equation is exactly why so many people put the whole thing in the too hard basket. So here is the full picture: every cost involved in moving a home loan, the simple way to work out whether the saving beats the cost, and the situations where the honest answer is that refinancing is not worth it.

One thing up front. We are not going to quote you fee figures in this article, because they vary by lender, by loan and by the day, and a number that was right when we wrote this could be wrong by the time you read it. What we can do is name every cost so nothing surprises you, and then confirm the exact figures for your lender and your loan as part of our free rate check. That is general information versus your actual numbers, and the second one is the one that matters.

The cost of leaving: discharge and settlement fees

Your current lender charges a fee to close out your loan and release the mortgage. It goes by different names (discharge fee, settlement fee, termination fee) but it is the same thing: an administrative charge for letting you go. It exists at almost every lender and it is usually the smallest item on the list. Annoying, not decisive.

Government registration fees

When a mortgage moves from one lender to another, the old mortgage has to be removed from the property title and the new one registered. In WA that happens through Landgate, and the state charges fees for both steps. These are set by the government rather than the lender, they change periodically, and they apply to essentially every refinance. Again, in the scheme of a home loan they are a modest, one time cost.

The cost of arriving: new lender setup fees

Some lenders charge an application fee, a valuation fee or a settlement fee on the way in. Many waive some or all of these to win refinance business, and some run cashback offers that more than cover the switching costs above. Whether the lender with the best rate for your situation is also waiving fees that month is exactly the kind of moving target a broker tracks so you do not have to.

The LMI trap: check your equity before anything else

This is the one that can genuinely change the answer, and it is the first thing we check.

If your equity is below 20 percent of your property's current value (in other words, if the new loan would be more than 80 percent of what the property is worth), refinancing can trigger lenders mortgage insurance on the new loan. LMI generally does not transfer between lenders, so this can happen even if you already paid it once on your original loan. A second round of LMI can run to thousands of dollars and wipe out years of rate savings in one hit.

The good news for many Perth homeowners is that property values have risen strongly in recent years, so plenty of people who bought with a small deposit are now comfortably past the 20 percent mark without realising it. That is why the equity check comes first: it decides whether the rest of the maths is even worth running.

Fixed rate break costs

If you are on a fixed rate and you leave before the fixed term ends, your lender can charge a break cost. This is not a flat fee. It reflects the lender's loss on the funding behind your fixed rate, so it depends on your balance, how long is left on the term, and how rates have moved since you fixed. It can be trivial and it can be substantial, and you cannot tell which from the outside.

The only reliable way to know is to ask your lender for the exact break cost figure, which is a quick phone request. We do this as a matter of course when someone on a fixed rate asks us whether moving makes sense, because no comparison means anything until that number is on the table.

The cost nobody puts on the list: doing nothing

Every cost above is a one time charge. The cost of staying on an uncompetitive rate is charged every month, indefinitely. Regulators have repeatedly found that existing borrowers tend to pay more than new borrowers at the same lender, because the sharpest pricing goes to the customers a bank is trying to win, not the ones it already has.

So the real comparison is never "refinancing costs versus free". It is a known, one time set of switching costs versus an open ended monthly overpayment. Framed that way, the question stops being whether refinancing has costs (it does) and becomes whether the saving beats them, and how quickly.

The break-even test: the only maths you need

Add up the switching costs. Divide by your monthly saving. The answer is the number of months until the refinance has paid for itself. Everything after that is money in your pocket.

A purely illustrative example with round numbers: suppose the total cost of switching came to $1,000 all in, and the sharper rate saved you $250 a month. Break-even would be four months. Month five onward, the saving is real. Run the same illustration with a $100 monthly saving and break-even stretches to ten months, still fine on a loan you will hold for years. Those numbers are made up to show the method; your own figures are the ones that decide it.

As a rough rule of thumb: break-even inside 12 months is usually a clear yes. Break-even beyond 24 months deserves a hard look, because it means either the costs are high (often a break cost or LMI) or the saving is thin. You can pressure test the repayment side yourself with our loan repayment calculator, or send us your numbers and we will do the whole thing for you.

When refinancing is not worth it

We would rather tell you this now than after you have spent an evening gathering paperwork. Refinancing is usually the wrong move when:

• You are selling within the year. There may not be enough months of savings left to recover the switching costs before the loan closes anyway.
• Your equity is under 20 percent. If the refinance can trigger LMI again, the maths rarely survives it. Sometimes the right answer is to wait for equity to build and reprice with your current bank in the meantime.
• Your fixed rate break cost is large. Sometimes the better play is to diarise the fixed expiry date and have a new loan ready to settle the week the term ends, which is something we set up for clients routinely.
• The loan balance is small. A rate improvement on a modest balance saves less per month, so the same costs take much longer to recover. The maths can still work, but it has to be checked, not assumed.
• Your financial position has weakened since the original loan. If income has dropped or credit has taken a knock, an application may not land the rate you are hoping for. Better to know that before anything is lodged, not after.

If any of these describe you, that is not a dead end. It just changes the play, which brings us to the option most articles skip.

The alternative: reprice with your own bank

You do not always have to move to win. Lenders know exactly what it costs them to lose a customer to a competitor, and a well put repricing request (your loan details, your conduct, and evidence of what other lenders are offering someone like you) frequently gets a rate cut with no discharge fees, no government fees, no application and no paperwork beyond the request itself.

The catch is that banks price these requests based on how credible the alternative is. That is where a broker's market data does the heavy lifting: when the comparison in the request is real and current, the bank has a genuine decision to make. Repricing is often the first lever we pull, and if your bank moves far enough, the honest advice is to stay put and bank the saving. Refinancing is the tool for when they will not.

The short cut: let us run the numbers

Everything above is doable on your own: ring your lender for the discharge fee and any break cost, look up the government fees, check your equity against a current valuation, compare the market, and run the break-even. Or you can send us a few numbers from your loan statement through our free rate check and we will do all of it, including confirming the exact fees for your lender and your loan.

You will get a straight answer in one of three forms: your loan is worth moving, it is worth repricing with your own bank first, or it is already fine and you should leave it alone. If it is the third one, we will say so plainly, because we are the same two ex-bankers you would be dealing with at settlement and our name is on the advice. There is no cost for the check, and refinancing through a broker costs you nothing either, as brokers are paid by the lender at settlement.

For the wider picture on how the refinance process runs from application to settlement, our Perth refinancing guide covers it end to end. And if your loan questions are bigger than the rate (structure, offset strategy, the next property), our residential finance page covers how we think about the whole journey.

This article is general information only and does not take your personal circumstances into account. Fees, charges and lending criteria vary by lender and change over time. We confirm the exact figures for your loan and lender as part of any review, and we will work through the numbers with you before anything is lodged.

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