A refinance application fee is only one of several costs that can apply when you switch your home loan. The real test is whether the total cost of switching is lower than what you expect to save.
For Queensland borrowers, the decision usually comes down to a comparison of dollars saved each month against fees paid once. This article explains which fees can apply, which cannot, and how to weigh them up.
What Is a Refinance Application Fee?
An application fee is a charge some lenders apply when you apply for a new loan. It is one of the costs the government's Moneysmart website lists for switching, alongside a discharge fee on your old loan and, if you stay with your current lender, a possible switching fee. Fee amounts are set by each lender, so they vary. Some lenders charge them and some do not, so check the product disclosure documents for each loan you consider.
Because fees differ between lenders, the sensible approach is to ask for every upfront and ongoing fee in writing before you lodge a refinance application. A broker can collect these figures across several lenders so you compare like with like.
Which Other Costs Can Apply When You Switch Loans?
Beyond the application fee, the costs that can apply are a discharge fee on your old loan, a break fee if you are on a fixed rate, and lenders mortgage insurance (LMI) if you have less than 20 per cent equity. Moneysmart also notes you may be liable for stamp duty and should check this with the lender.
A discharge fee covers closing out your existing loan and can include legal and land registry costs. Land registry fees are set by each state and territory.
Exit fees are treated differently. Under the National Consumer Credit Protection Regulations, a lender cannot charge a fee on termination of a loan secured by residential property if the contract was entered into on or after 1 July 2011. That prohibition does not cover break fees or discharge fees, so those can still apply.
The trade-off is that a lower rate can come with upfront costs. If you have less than 20 per cent equity, LMI on the new loan can raise the cost of switching. You may be able to ask for a refund of part of the LMI on your current loan.
How to Check Whether Refinancing Fees Are Worth Paying
A refinance is worth it when the savings over the time you hold the new loan exceed the total cost of switching, including any broker fees. ASIC's guidance for licensees says the same: overall cost savings should be weighed against the cost of the transaction and any loss of benefits.
Consider a borrower with a $500,000 balance and 25 years remaining. Their current loan is at an illustrative 7.25% p.a., and a lender offers an illustrative 6.75% p.a. The repayments are about $3,614 a month on the current loan and about $3,455 on the new one. That is roughly $159 less each month, or about $1,900 a year.
Assume the application, discharge and any other fees total $800. At roughly $159 a month, the fees are recovered in about five months. If the same borrower faced $4,000 in combined costs, it would take about 25 months. The borrower plans to keep the loan for at least five years, so the switch holds up in both cases.
The figures above are illustrative only and use the same 25-year term for both loans. Moving to a longer term can lower repayments but increase the total interest paid, so ASIC says you should be told about that effect. A loan health check can show where your current loan sits before you commit to any fees.
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What Does Coming Off a Fixed Rate Mean for Break Fees?
A break fee applies only if you end a fixed rate loan before the fixed term finishes. It is not charged on variable rate loans, so waiting until the term ends can avoid it.
If your fixed term is close to finishing, timing matters. Refinancing once the term has ended avoids the break fee, though your lender may move you to its standard variable rate in the meantime. Our page on fixed rate expiry explains what to line up in the months before your term ends.
Can You Claim Refinancing Costs on an Investment Property?
Some borrowing expenses on an investment loan can be deductible, but the rules depend on how the loan is used, so confirm the details with your accountant. The ATO lists loan establishment fees, mortgage broker fees, valuation fees required for loan approval and LMI billed to the borrower as borrowing expenses.
Where total borrowing expenses are more than $100, they are generally deducted over five years or the loan term, whichever is shorter. Expenses on any part of the loan used for private purposes cannot be deducted.
A refinance can also change how much interest you can claim. If you borrow extra and use it for personal purposes, the interest must be apportioned. The ATO treats the use of the borrowed money as the test, not the security. If you are weighing up an investment loan refinance, speak to your accountant before you restructure.
Does Your Lender Have to Approve a Refinance?
Yes. A new lender must assess your finances and confirm the loan suits your needs. If you are moving to a lower rate without borrowing more, a consistent repayment history on your existing loan is usually an important factor in that assessment.
Some borrowers who made repayments on time may still find the new lender's serviceability checks are stricter than when they first borrowed. Lenders assess new borrowers at a rate at least 3 percentage points above the loan rate. Checking your borrowing capacity before you apply helps avoid a declined application.
If you would like to know what a switch would cost you and what it could save, we can run the numbers for your loan.
Frequently Asked Questions
What is a refinance application fee?
It is a charge some lenders apply when you apply for a new loan. Amounts are set by each lender, so ask for every fee in writing before you apply.
Can a lender charge an exit fee when I refinance?
For residential loans entered into on or after 1 July 2011, lenders cannot charge a fee on termination. Break fees on fixed rate loans and discharge fees are not covered by that rule, so they can still apply.
How do I know if refinancing is worth the fees?
Compare your expected monthly saving with the total cost of switching, including any broker fees. Divide the total cost by the monthly saving to see how many months it takes to recover the cost.
Are refinancing costs tax deductible on an investment property?
Some borrowing expenses on an investment loan can be deductible, usually over five years. Expenses for any private use of the loan are not deductible, so speak to your accountant.
