What does refinancing actually cost?

The cheapest variable home loan on our board is Greater Bank's Great Rate at 6.09% (6.10% comparison). The median of the 60 variable rates we track is 6.38%. On a $600,000 balance, a gap of 0.29 percentage points is worth about $1,740 a year in interest, and that is what a refinance is meant to capture.

The cost of capturing it came up on r/AskAnAussieBroker this week. Under a post about refinancing, u/Immediate_Rice_5032 asked: "How about the cost of refinancing?" u/EventEastern2208 put the total at "usually around $1,000 to $1,500 all up". The itemised list is the place to check it.

Moneysmart's switching guide lists the charges: a discharge fee to close the old loan, an application fee on the new one and a switching fee for a new loan with the same lender. Stamp duty can apply in some cases, and a fixed loan can carry a break fee. Under 20% equity it adds lender's mortgage insurance, which it says can "increase the cost of switching and outweigh the savings you'll get from a lower interest rate".

Set against the rate gap, the rest is small. Thirty-three of the 60 variable loans list $0 in fees, and the cheapest of them charges $500 to set up. If the whole switch came to $1,000, seven months of the gap above would cover it.

The term is where a refinance gets expensive. A new loan usually prices over 30 years. Moneysmart's warning is that you "could end up with a longer loan term than the years left to pay off your current mortgage", and the repayment will look better for it.

Take a hypothetical $550,000 balance at 6.38%, with 25 years to run, principal and interest. The repayment is $3,673 a month. Move it to 6.09% and keep the 25 years: $99 a month less, and $29,558 less interest over the life of the loan. Take the same 6.09% over 30 years: $343 a month less, and $96,840 more interest.

The lower rate is worth $29,558 across those 25 years. The five extra years cost $126,398. A refinance can carry both, and the repayment only shows the flattering half.

Equity decides which rates you can reach. Forty-three of the 60 variable loans on our board publish a cap of 70% LVR or less. Four publish 90% or more, and Up's no-fee variable at 6.20% is the cheapest of them.

Fixed loans are their own case. A break fee can dwarf everything above, and the number moves. Bank of China lifted every fixed term by 0.30 percentage points in our readings since Tuesday's decision, and P&N Bank by 0.25 to 0.30.

Our 6.09% is advertised pricing, recorded before the November rise reached variable rates. The cash rate went to 4.85% on Tuesday, Macquarie's increase of 0.25 percentage points takes effect on 19 November, and none of the 60 variable loans had moved yet. The Reserve Bank's lending rates table puts the average outstanding owner-occupied variable loan at 6.2% in August, the same as the average new one. The spread sits in the tail rather than the middle.

Ask for the term in years, and the discharge fee in writing, before you read the repayment.

We don't receive commissions or affiliate payments from lenders, and this is general information, not personal advice.