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Refinancing: The $800 cost that could save you thousands

Here’s how to secure a low enough rate to make the upfront cost worth it.

A composite image Australian property and Australian currency to represent the cost of refinancing a home loan.
Refinancing your home loan may not always be worth it. (Source: AAP)

Refinancing to a lower-rate loan can be the easiest way to cut monthly home loan repayments, but it’s not free.

In fact, borrowers would need to secure a low enough rate to cover the cost of refinancing, Canstar analysis found.

The average cost to refinance an owner-occupied home loan in Australia is $803. That includes fees such as the discharge, application, valuation, documentation, legal and settlement costs.

What rate would make the switch worth it?

To recoup the average cost of refinancing within the first 12 months of making the switch to a lower rate on a $500,000 loan, a borrower with an existing average variable rate of 6.98 per cent would need to secure a rate discount of 0.21 per cent.

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Making the switch to a rate of 6.77 per cent would cut repayments by $67 per month or a total of $804 in the first year, which is enough to cover the cost of refinancing.

Getting a rate discount is key to cutting repayment costs and recouping refinancing fees, according to Canstar editor-at-large Effie Zahos.

“The number of home loans refinanced has reached record highs recently. In the 12 months to April, 433,453 loans were refinanced to a new lender, according to the latest figures from the Australian Bureau of Statistics,” Zahos said.

“If borrowers are spending, on average, just over $800 per refinance, this means that collectively they could have spent more than $348 million in refinancing fees in one year.

“Borrowers have to get enough of a rate discount to make sense of switching. Refinancing doesn’t come for free. There are costs associated with switching lenders that you need to recoup.”

Don’t be tempted to extend the life of your loan

Zahos said while the aim was to try to always secure the lowest possible rate, it was important not to get tempted by some tricks.

“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,” she said.

“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.”

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