Understanding Home Loan Refinance Rates and the Costs Involved
Did you know that home loan refinancing increased by almost 14% during the past financial year? This is according to the latest research data from PEXA. That means over 450,000 Australian homeowners took the leap and chose to do a home loan refinance. Why? For many, it comes down to cost.
Lenders frequently offer home loan refinance rates that are significantly lower than their standard variable interest rate (the rate your mortgage will automatically roll onto after your fixed rate term ends). By comparing refinance rates, homeowners may find they can save a significant amount of money.
While refinancing can undoubtedly save some mortgage holders money, it’s still a serious financial decision that comes with certain associated costs. Homeowners should take the time to weigh up the various refinancing benefits and costs before committing to a final decision. However, in a market that is flush with lenders and countless different home loan products, the idea of sifting through all the options can understandably seem overwhelming. And trying to do this on your own could result in you paying more than necessary to refinance.
In this article, you’ll learn what steps are involved when it comes to comparing home loan refinance rates, as well as how much it costs to refinance a home. We’ll also discuss some refinance rate trends and what you need to do to ensure you’re well-informed before you sign on the dotted line.
Why Should You Consider a Home Loan Refinance?
First of all, what does home loan refinancing involve, and why should you consider home loan refinancing? Mortgage refinancing is when you apply for a new home loan to replace an existing one, typically to secure lower interest rates or better terms and conditions.
The sharp rise in interest rates in 2023 has resulted in mortgage holders paying substantially more for their monthly repayments. This has made it more difficult for many people to service their existing home loans. But with competitive home loan refinance rates being offered by a range of lenders, refinancing could save you quite a bit of money.
Another reason some people will look at refinancing a loan is to gain more flexibility in loan terms. Some lenders may allow you to link an offset account, access a redraw facility or give you other desirable features that your current loan doesn’t have. You may also be able to extend your loan term back out to 25 or 30 years, which will reduce your monthly repayments and could make servicing the loan more manageable. You can also use refinancing to help with debt consolidation or to access equity.
Understanding Home Loan Refinance Rates
So, what kind of home loan refinance rates are currently available to Australian mortgage holders? Well, the good news is there is currently a lot of competition among lenders when it comes to refinancing. Why? An estimated 300,000 Aussie households are currently experiencing negative cash flow and there is a $141 billion wave of fixed-rate home loans that are expiring this year.
To stay competitive, banks have started offering discounted interest rates and even cashbacks on some of their home loan refinance rates. Based on current refinance rate trends, we expect that lenders will continue to offer reduced interest rates and other incentives for refinancing into 2024.
Refinance Rate Trends
If you’re looking for the best refinance rates in Australia, it helps to first understand recent refinance rate trends. Interest rates on home loans are heavily influenced by the official cash rate, which is set by the Reserve Bank of Australia (RBA). From just 0.1% in January 2022, the cash rate continually increased up to 4.35% by November 2023. At this stage, the RBA has not ruled out further increases in the near future.
What does this mean for the average mortgage holder? According to Forbes Advisor, a family with an average $585,000 mortgage would now be paying an extra $1,415 per month, just on interest, compared to before the RBA started lifting the cash rate. However, by comparing refinance rates, a homeowner may be able to obtain a more competitive interest rate.
Currently, all of the Big Four banks are offering home loans in the 6.09% to 6.99% range, while some lenders are still offering fixed interest rates in the high 5% mark. To ensure an accurate comparison of the best refinance rates in Australia, talk to an experienced mortgage broker about refinancing your home loan.
Steps to Follow When Refinancing a Loan
If recent refinance rate trends have you intrigued, you’re probably now wondering what’s involved in refinancing. While the specifics may vary, the process will usually include the following steps:
- Meet with a mortgage broker to analyse refinancing benefits and costs.
- Start comparing refinance rates currently on offer (a broker can do this for you).
- Gather applicable documents to support your application.
- Fill out an application form for refinancing with your chosen lender.
- The lender will conduct an assessment and determine your borrowing capacity.
- Once approved, the lender will create new home loan documents for you to sign and return.
- Finally, settlement will occur.
Types of Home Loan Refinancing
Before you can start calculating refinancing costs, you should determine what type of refinancing you have access to. The two most common types are:
- External Refinance – this refers to refinancing that transfers your loan to another lender.
- Internal Refinance – this is when you refinance your home loan with your current lender.
The type of refinancing that you choose will determine how much refinancing will cost and the amount of time it will take to complete the process. Opting for internal refinancing may speed up the process and save you from paying all the fees associated with shifting to another lender. A broker with access to a full panel of lenders can help you make an informed decision regarding home loan refinance rates and what type of refinancing will be most beneficial for you.
Refinancing Benefits and Costs
Refinancing a home loan will usually involve certain costs. Some of the typical upfront refinancing fees you might encounter include:
- Mortgage Application Fee: Also known as an ‘establishment fee’ or simply the ‘upfront fee’. The average mortgage application fee is a one-time payment used to set up the loan and the administration costs. This fee is usually around $250 but can be as high as $800-$1,000.
- Property Valuation Fee: If you’re working with a new lender, they may request an updated property valuation. On average, a valuation costs around $300-$600 but it can go up to $1,000. However, most “standard” valuation costs are covered by the lender. Valuation fees may be higher for rural properties and/or properties priced over $1.3M, and these are usually quoted on an individual basis.
- Discharge Fee: Your current lender may expect you to cover the administrative costs related to ending your loan contract. The average discharge fee is between $350 and $400 but can be as high as $1,000.
- Break Cost: If you have a mortgage with a fixed interest rate, you may be charged a break cost. This covers any possible losses that your current lender may face because of the ‘economic cost’ of your prior fixed rate agreement not running its original term. This cost is a bit tricky to calculate, but it typically depends on three factors: the loan amount, the fixed rate compared to the current variable market rate and the time remaining on the fixed term. This cost needs to be requested directly from the lender.
- Settlement Fee: A new lender usually requires you to pay a settlement fee to straighten out the new loan. It’s also used to cover the cost of a legal representative who will look after the loan settlement. Settling a home loan typically costs around $210, although it can cost as much as $800.
- Mortgage Registration Fees: The State Government charges a mortgage registration fee to ensure that you pay back the lender before you can sell the property. Although it varies by state and territory, the mortgage registration fee generally costs anywhere from $100 to $250.
- Exit Fees: In line with government reforms, lenders are not allowed to charge early exit fees on loans taken out after the 1st of July 2011. But if you took out a loan before this date, lenders may still charge an exit fee. An exit fee can cost anywhere up to $7,000, but you’ll need to check the terms of your existing loan to know if this fee applies.
- Time and effort: While not a direct financial cost, it’s important to consider the time and effort involved when weighing up refinancing benefits and costs. Refinancing your home loan demands careful attention to detail and lots of paperwork. Many homeowners find it beneficial to work with a trusted mortgage broker who can navigate the process smoothly, saving them valuable time and effort.
Additional Considerations When Comparing Refinance Rates
Apart from the upfront costs mentioned above, there are a few other factors to consider when refinancing your home loan. These include:
- Interest Rates: When comparing refinance rates, it’s important to look at various lenders and evaluate the long-term benefits of each loan type. Consider factors such as fixed-rate versus variable-rate loans, as well as any potential rate changes during the loan term. Save time by having an expert mortgage broker do the research for you. Mortgage brokers have a legal duty to work in your best interest, so you can trust they’ll use their extensive access to lenders to help you make an informed decision.
- Loan Terms and Conditions: When considering home loan refinance rates, take the opportunity to also review the loan terms and conditions on offer. Look for flexibility in repayments, the ability to make additional payments and options for offset accounts or redraw facilities (if this is something you think you could benefit from). A mortgage broker can give you a full home loan health check of your current loan and compare your terms and conditions to what else is currently available.
- Lender’s Reputation and Customer Service: It’s important to choose a reputable lender with excellent customer service. Read reviews, seek recommendations and consider engaging with a mortgage broker who can help you find a lender that aligns with your needs and expectations.
- Financial Goals and Circumstances: Before refinancing, reassess your financial goals and circumstances. Think about whether you plan to stay in the property for an extended period and the potential impact of refinancing on your credit score. You should also factor in any upcoming life events that could affect your ability to make repayments.
Get Expert Advice on Home Loan Refinance Rates
Weighing up refinancing benefits and costs may seem daunting to some. However, the potential savings generated by securing a lower interest rate can often substantially outweigh these initial expenses. Depending on your circumstances, mortgage refinancing costs can often be recovered in a fairly short period of time. Additionally, some lenders are now offering cashbacks, which can help offset these expenses.
At North Brisbane Home Loans, we prioritise transparency. We’re here to guide you through the entire refinancing journey to make it as easy for you as possible. We’ll help with comparing refinance rates and can answer any questions you may have about the process. If you’d like some expert assistance analysing home loan refinance rates, then contact us today. We’ll happily help you take those first steps towards a more financially advantageous future.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
