Hidden Costs and Pitfalls: What to Watch Out During Housing Loan Refinancing

Housing loan refinancing is a popular strategy among Australian homeowners looking to secure better interest rates, reduce monthly repayments, or access equity for renovations or investments. While the benefits of housing loan refinancing can be substantial, it’s crucial to be aware of the hidden costs and potential pitfalls that could turn your savings into unexpected expenses. If you’re considering housing loan refinancing, here’s what you need to watch out for to ensure your financial move is truly worthwhile.

The Main Hidden Costs of Housing Loan Refinancing

1. Loan Application Fees

Most lenders in Australia charge an application fee when you apply for a new mortgage as part of your housing loan refinancing. This fee covers the administrative costs of processing your application and can range from a few hundred to over a thousand dollars, depending on the lender and loan product.

2. Property Valuation Fees

A property valuation is typically required to determine the current market value of your home before refinancing. Valuation fees can vary significantly, often landing between $100 and $600, but sometimes higher for complex properties or certain locations. Some lenders may bundle this into the application fee, but not always, so it’s important to clarify upfront.

3. Legal and Settlement Fees

Legal work is necessary to discharge your old loan and set up the new one. This involves solicitors or conveyancers, and their fees are an unavoidable part of the housing loan refinancing process. Settlement fees, preparation of mortgage documents, and title search fees can add up quickly, so always request a full breakdown from your lender or broker.

4. Lender’s Mortgage Insurance (LMI)

If your new loan amount exceeds 80% of your property’s value, you may be required to pay Lender’s Mortgage Insurance (LMI) again—even if you paid it with your original loan. LMI is a one-off, potentially significant cost that protects the lender (not you) if you default on your loan. In some cases, LMI can run into the thousands or even tens of thousands of dollars, so it’s essential to factor this into your calculations.

5. Break Costs or Early Repayment Fees

If you’re refinancing a fixed-rate loan before the end of its term, your current lender may charge break costs or early repayment fees. These fees compensate the lender for lost interest and can be substantial, especially if market rates have dropped since you locked in your fixed rate. Always ask your lender for an estimate of break costs before proceeding with housing loan refinancing.

6. Discharge Fees

Discharge fees are charged by your current lender to cover the administrative costs of closing your existing mortgage. These fees typically range from $150 to $500, but can be higher depending on your lender and loan terms.

7. Ongoing Fees

Don’t forget to consider the ongoing fees associated with your new loan, such as monthly account-keeping fees, annual package fees, or offset account charges. These can erode the savings you hope to achieve through housing loan refinancing if not carefully weighed against the benefits.

8. Government Fees

State and territory governments charge mortgage registration and deregistration fees when you refinance. These are usually modest (around $100–$150 each), but they’re still part of the total cost equation you need to consider.

Common Pitfalls in Housing Loan Refinancing

• Not Comparing All Costs and Features: Many homeowners focus solely on the interest rate or attractive cashback offers, ignoring other costs and features that could impact their long-term savings.
• Refinancing Too Often: Each time you refinance, you incur new fees. Refinancing too frequently can accumulate costs that outweigh the benefits, especially if you extend your loan term each time.
• Extending the Loan Term: While refinancing into a new 30-year loan can reduce your monthly repayments, it may increase the total interest paid over the life of the loan. Consider whether it’s better to maintain your current loan term or even shorten it if possible.
• Failing to Calculate the Break-Even Point: Always calculate how long it will take for your savings from a lower interest rate to cover the upfront costs of refinancing. If you plan to move or sell your home soon, you may not recoup these costs.
• Overlooking LMI Triggers: If your equity has fallen below 20% due to market changes or a higher loan amount, you could be hit with a new LMI premium.

FAQs about Refinancing Home Loans

Q1: How long does the housing loan refinancing process take in Australia?

The refinancing process usually takes anywhere from a few weeks to a couple of months, depending on the lender’s requirements, property valuation, and how quickly you can provide the necessary documentation. Delays can occur if there are issues with property valuation or if your financial situation has changed since your original loan.

Q2: Can I refinance my home loan if I have less than 20% equity?

Yes, you can refinance with less than 20% equity, but you’ll likely be required to pay Lender’s Mortgage Insurance (LMI) again, which can be expensive. It’s important to weigh the cost of LMI against the potential savings from refinancing to determine if it’s worthwhile.

Final Thoughts

Housing loan refinancing can be a powerful financial tool, but only if you go in with your eyes wide open to the hidden costs and common pitfalls. Always ask your mortgage broker for a full breakdown of all fees, calculate your break-even point, and compare offers from multiple lenders. By understanding the true cost of housing loan refinancing, you’ll be better positioned to make a decision that genuinely benefits your financial future.  Loans and Mortgages are the Mortgage broker firm in Australia specializing in approaching financial services. For more details call us on 0403 803 470.