The Real Cost of Refinancing: What to Check Before You Switch

Refinancing is usually presented as a rate comparison. Find a lower number, move your loan, save money.

The rate is the easy part. What decides whether a refinance actually pays is the set of costs and constraints that never appear in the advertised comparison, and this guide covers all of them.

Key Takeaways

• Switching carries real costs including discharge, application, valuation and government registration fees.
• Breaking a fixed loan early can cost thousands, and the figure is calculated by the lender rather than fixed in advance.
• Lenders mortgage insurance does not transfer, so refinancing above 80% loan to value can mean paying it twice.
• Lenders must assess you at your rate plus three percentage points, which is why some borrowers cannot refinance to a cheaper loan.
• Rolling short-term debts into a thirty-year mortgage lowers repayments and can substantially increase what you pay overall.

The Costs Nobody Puts in the Calculator

Start with the exit. Your current lender will generally charge a discharge or settlement fee for releasing the mortgage, and some older loans still carry early repayment penalties.

Then the entry. A new lender may charge an application or establishment fee, a valuation fee, and in some cases an ongoing annual package fee that offsets part of the rate saving.

Government charges sit on top of both. Discharging the old mortgage and registering the new one attracts state-based land titles fees, and the amounts differ depending on where the property sits.

None of these are enormous individually. Together they routinely reach several hundred to a couple of thousand dollars, which is enough to change whether a switch makes sense.

Some lenders waive parts of this to win the business, particularly the application and valuation fees. Ask what is being waived in writing rather than assuming a verbal indication will hold at settlement.

Break Costs on a Fixed Loan

This is the highest single cost most people encounter and the hardest to predict. Exiting a fixed rate loan before the term ends can trigger a break cost, sometimes called an economic cost.

The figure is not a set fee. Lenders calculate it based on the difference between the rate you locked and current wholesale funding rates, the remaining term, and your balance, which means it can be negligible or it can run into thousands.

Ask your current lender for a written break cost quote before you do anything else. The number is only valid for a short window, so treat it as a snapshot rather than a fixed figure.

Timing can help here. If your fixed term expires within a few months, waiting it out often costs less than breaking, and you can have the new loan ready to settle as the fixed period ends.

Lenders Mortgage Insurance Does Not Come With You

This one catches people who bought with a small deposit. If your loan-to-value ratio is still above 80%, the new lender will generally require lenders mortgage insurance, and the premium you paid the first time is not transferable.

You do not get a refund, and you do not get credit for it. You pay again, on the new loan, to a policy that protects the lender rather than you.

Work out your current position before you start. If you are close to 80%, waiting until you cross it, or paying down the difference, can be worth far more than a small rate improvement.

The Serviceability Trap

Here is the constraint that surprises borrowers most. Australian lenders must assess whether you could afford repayments at your actual rate plus a buffer of three percentage points, a requirement set by the prudential regulator and held at that level since late 2021.

That means a loan at 6% is tested at around 9%. It applies to refinancing as well as to new borrowing, so you can be refused a cheaper loan you are already comfortably servicing at a higher rate.

The term for this is mortgage prison, and it is a genuine constraint rather than a rhetorical one. Circumstances that have changed since you first borrowed, such as a new dependant, reduced income or added debts, can all move you the wrong side of the assessment.

There is a workaround worth knowing. A refinance home loan broker deals with these assessments daily and will know which lenders currently apply a reduced buffer for refinancers with a clean repayment history, which can be the difference between an approval and a decline.

Resetting the Loan Term

Most refinances default to a fresh thirty-year term, which is presented as lower repayments. That framing is technically accurate and can be quietly expensive.

If you are eight years into a loan and refinance back to thirty years, you have added eight years of interest to the tail. The monthly figure falls, and the total cost of the debt can rise even at a lower rate.

Ask the new lender to match your remaining term instead. Repayments will be higher than the headline figure, though you keep the progress you have already made.

Debt Consolidation Deserves a Warning

Rolling credit cards, car finance and personal loans into a mortgage is often presented as a saving, and the interest rate genuinely is lower. Two things change alongside it.

First, the term. A five-year car loan absorbed into a thirty-year mortgage keeps accruing interest for twenty-five extra years, so a lower rate over a much longer period can still produce a larger total.

Second, the security. Unsecured debts become secured against your home, which alters what is at risk if you cannot pay.

Consolidation can be the right call, particularly for high-rate revolving debt where the alternative is going nowhere. 

If you do it, ask about splitting the consolidated portion onto a shorter term rather than absorbing it into the full thirty years.

Reasons to Refinance That Are Not About Rate

Rate gets the attention, though it is often not the strongest reason to move. Loan features can matter more over a full term.

An offset account is the clearest example. Every dollar sitting in it reduces the balance interest is calculated on, which for someone holding a decent cash buffer can outperform a modest rate reduction.

Accessing equity is another. If your property has gained value, refinancing can release some of that for renovations or a deposit on another purchase, which is a structural change rather than a saving.

Then there is simple flexibility. Redraw, the ability to make extra repayments without penalty, and splitting between fixed and variable are all features worth switching for if your current loan lacks them.

Cashback and Introductory Offers

Cashback deals move in and out of the market and can genuinely offset switching costs. Read what sits underneath the headline.

Check whether the advertised rate is introductory and what it reverts to, whether the offer requires a package with an annual fee, and whether there are clawback conditions if you leave within a set period. A rate that increases after twelve months can undo a cashback several times over.

Cashback is also assessable in some circumstances, so it is worth asking your accountant if the property is an investment. Treat it as one input rather than the deciding factor.

Working Out Your Break-Even

The calculation is simple once you have the numbers. Add every switching cost, divide by your monthly saving, and you have the number of months before you are ahead.

If that figure is longer than you expect to hold the loan, the refinance does not pay. Compare on the comparison rate rather than the headline rate, since it folds in most standard fees.

Be realistic about the holding period. People move, restructure and refinance again far sooner than they plan to, so a break-even of three years is a different proposition to one of eight months.

Conclusion

Refinancing is frequently worth doing and rarely as simple as the rate difference suggests. Break costs, lenders’ mortgage insurance, the serviceability buffer and the term reset are the four things that most often turn an apparent saving into a loss.

Get a written break cost quote, check your loan to value ratio, work out your break-even in months, and ask for your existing term to be matched. Then compare.

Refinancing FAQs

What does it cost to refinance a home loan? Typically a discharge fee from your current lender, an application and valuation fee from the new one, and state-based government registration charges. Fixed loans may also attract break costs.

What are break costs? A charge for exiting a fixed rate loan early, calculated by the lender using the rate difference, remaining term and balance. Request a written quote before proceeding.

Do I pay lenders mortgage insurance again when refinancing? Generally yes, if your loan-to-value ratio is above 80% at the new lender. The premium is not transferable and is not refunded.

Why was I declined for a lower rate than I currently pay? Lenders must assess you at your rate plus three percentage points. Changed circumstances can mean you fail that test even on a cheaper loan.

What is mortgage prison? Being unable to refinance because you no longer pass a new lender’s serviceability assessment, despite meeting your existing repayments.

Should I keep my current loan term when refinancing? Usually yes. Resetting to a fresh thirty years lowers repayments but adds years of interest to the total cost.

Is consolidating debt into my mortgage a good idea? It can be, though it stretches short-term debts over a much longer period and converts unsecured debt into debt secured against your home. Ask about splitting it onto a shorter term.

How do I work out if refinancing is worth it? Add all switching costs and divide by your monthly saving to get a break-even in months. Compare loans on the comparison rate.

How often should I review my home loan? Every one to two years is a common guideline, since lender pricing and your own circumstances both change.

What should I check before choosing a broker? Confirm they hold or operate under an Australian Credit Licence, and that they belong to an external dispute resolution scheme. Both should be published.