When you refinance, you are closing one loan and opening another. The costs associated with that process are predictable and generally manageable. The main ones are: a discharge (settlement) fee from your existing lender, typically $150 to $400; state government mortgage registration fees, typically $200 to $400 in South Australia; and any application or valuation fees from your new lender, many of which are waived in competitive refinance offers.
If your new lender requires a valuation, you may pay $300 to $600 for that. Legal or conveyancing fees are usually minimal for a straight refinance - often $300 to $600 if required at all. In total, a standard variable-to-variable refinance typically costs $700 to $1,500 before any cashback or rate savings are factored in.
If you are on a fixed rate loan and want to refinance before the fixed period ends, your lender can charge a break cost. This is not a flat fee - it is calculated based on the difference between your fixed rate and current wholesale rates, your remaining loan balance, and the time remaining on your fixed term.
In a rising rate environment (where market rates are now higher than your fixed rate), break costs may be zero or very small, because the lender can re-lend the money at a higher rate. In a falling rate environment, break costs can be substantial - sometimes tens of thousands of dollars. Always request a break cost estimate from your lender before making any decisions.
Many lenders offer cashback incentives of $2,000 to $4,000 to attract refinancers. These can comfortably cover all switching costs and leave you ahead from day one. But cashback is a one-time benefit. If the cashback lender's rate is 0.2% to 0.3% higher than the best available rate, the rate difference will cost you more than the cashback within 2-3 years on most loan sizes.
The right approach is to calculate the net outcome over your likely loan horizon - not just the cashback amount. We do this comparison for every client before recommending a refinance product.
Your break-even point is how long it takes for your interest savings to pay back the switching costs. The calculation is straightforward: total switching costs divided by monthly interest saving equals break-even months. For example, if switching costs are $1,200 and your new rate saves you $300 per month in interest, you break even in four months.
Most refinancers on variable loans break even within 6-12 months, after which every month is pure saving. If you plan to keep the loan for more than two years, refinancing is almost always worth the effort when the rate saving is meaningful.
Jason and Steve are Adelaide mortgage brokers who give honest advice at no cost to you. No obligation.
The information on this page is general in nature and does not constitute financial advice. Given Finance Pty Ltd (t/a Lendology) ACN 624 144 501 is authorised under LMG Broker Services Pty Ltd ACL 517192.