To switch or not: Is refinancing worth the ‘hassle’ as rates rise?

Couple standing in front of their new home.
Refinancing a home loan makes sense when the discount is good and you can recoup the cost of refinancing within the first year, though there’s no guarantee the lender you move to will keep your rate at that level.

Average Aussies are spending $803 on fees to refinance their home loan – over $348m annually – which can be recouped in a year with the right discount – but many more are already locked out.

New analysis by Canstar has found that Aussies have spent over $348m in the year to April on refinancing costs which includes fees such as the discharge, application, valuation, documentation, legal and settlement costs.

But Canstar editor-at-large and money expert Effie Zahos warned that interest rate hikes have already moved switching out of reach for some borrowers who are now locked in with their current lender.

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Canstar’s analysis of what rates would cover refinance costs for various loans.

“Unfortunately a break-even analysis for homeowners whose loan is over 80 per cent of the value of their property would more than likely show that the costs outweigh the benefits of refinancing,” Ms Zahos said.

A $500,000 borrower with a loan to value ratio that’s 90 per cent of the property’s value, for example, would need to secure a rate discount of 3.24 per cent to recoup their refinancing cost, Canstar found – taking their interest rate from 6.98 per cent to 3.74 per cent.

That 3.74 per cent rate “doesn’t exist in today’s market with the lowest rate on listed at 4.94 per cent”.

Ms Zahos said borrowers have to get enough of a rate discount to make sense of all the headaches involved in switching.

“Refinancing doesn’t come for free. There are costs associated with switching lenders that you need to recoup,” Ms Zahos said.

Supplied Money Author Effie Zahos
Canstar money expert Effie Zahos said borrowers have to have enough of a discount to make sense of the hassle of refinancing.

To recoup the cost of refinancing within the first 12 months of switching, the average $500,000 loan (previously on a 6.98 per cent rate) would need a 0.21 percentage point discount to 6.77 per cent. That would cut repayments by $67 a month or $804 a year – covering the cost of refinancing in the first year.

“If you don’t secure a discount of at least 0.21 percentage points it’s not worth the hassle and paperwork,” Ms Zahos said.

“The aim of course is to try and always secure the lowest possible rate. In a rising interest rate market, there’s no guarantee that the lender you move to will always maintain that interest rate discount.”

“Once you secure a lower rate and make the switch, be careful not to extend your loan back to the full 30-year term when refinancing. While this will lower repayments even further, it takes longer to repay the loan and will see you pay more interest in the long run.”

The cost of refinancing has held relatively steady, with Canstar data from July last year showing it at $807, but the number of people refinancing has surged.

The 12 months to April 22 saw 379,991 loans refinanced to a new lender (collectively about $306m in fees) compared to 433,453 loans and $348m in the 12 months to April 23, Canstar said.

Canstar June 2023 research on refinancing.

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The research collated advertised fixed values put out by lenders for refinancing, finding 95 per cent had an average discharge fee of $331, 43 per cent had application fees averaging $495 and settlement fees of $246, 19 per cent had a valuation fee of $254, 7 per cent had a documentation fee of $316 and 25 per cent had a legal fee of $336.

The research was based on owner occupier variable loans rated in Canstar’s June 2023 Home Loan Star Ratings in the $500,000 loan amount and those paying principal and interest.

Ms Zahos top refinancing tip was to first give your current lender a chance to negotiate.

“Refinancing your loan takes time and effort. If your current lender comes to the party with a comparable offer you may save yourself both time and money.”

She said any refinancing cost must be covered to make sense of switching.

“If you are going to refinance your home loan, make sure it is worth it. Some refinancing fees may be negotiable and this could see you recoup costs faster. If it is going to take more than 12 months to recoup the cost of switching lenders then you may need to consider if this is the best option.”

Another tip was to consider a rate lock if refinancing to a fixed rate.

“Refinancing on average can take around four to eight weeks. In a rising interest rate market, this could mean the rate you picked may not be the rate you have when the loan is drawn down.”

Those looking to refinance should look at withdrawing their money from redraw.

“Money in redraw is a nice emergency or slush fund. Don’t lose it by refinancing before withdrawing these funds. Take it out, put it into a high-interest rate savings account and once your new loan is settled put this money back into the loan or into an offset account.”

Other tips were to submit the discharge form as soon as possible to fast track the process and be prepared with documents when you approach a prospective lender including bank statements, pay slips and other identification documents. “One of the biggest hold-ups of the refinancing process is often waiting on documentation for the approval process.”


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