What switching a home loan actually costs
The new rate looks better, but what are the actual costs of switching, and how do I add them up before deciding?
A lower rate is not the same as a better loan. Switching costs real money, and those costs sit on top of the difference in interest. Add them up before you decide, not after — because once you have signed, they are gone.
ASIC's guidance on refinancing is direct about this: discharge fees, loan arrangement fees and
lenders mortgage insurance are costs that
can outweigh the benefit of a lower interest rate
. Moneysmart lists the same categories
for anyone budgeting a switch. Here is what each one actually is, and where to find the number.
The categories of switching cost
| Cost | What it is | Where the number comes from |
|---|---|---|
| Discharge fee | A fee to close your current loan early. | Your current loan contract — you can check it now. |
| Application fee | An upfront fee charged when you apply for the new loan, if that lender charges one. | The new lender's fee schedule or your written quote. |
| Arrangement / switching fee | A fee for setting up the new loan, sometimes bundled with the application fee. | Ask the new lender to itemise it. |
| Break fee | If you are on a fixed rate and leave before it ends, a fee to exit early. | Your current fixed-rate contract. |
| LMI | Lenders mortgage insurance, which can apply when you have less than 20% equity. | Assessed by the new lender. Often appears as an upfront premium. |
| Valuation | A fee for the new lender to assess the property's value. | The new lender, if they require it. |
| Legal and government charges | Conveyancing/legal fees and government charges on the new loan. | Solicitor or conveyancer, and the new lender. |
LVR is the one that changes the whole picture. Moneysmart notes that if you have less than 20% equity, you might have to pay LMI, and that this can increase the cost of switching enough to outweigh the savings from a lower rate. If you are above 80% LVR, work out your LMI number before you fall in love with a headline rate.
The costs that are easy to miss
Some of the biggest switching costs are not fees at all. They are things you lose, or have to rebuild:
- An offset account balance. Money in an offset reduces the interest-bearing balance. If you switch to a lender without the same offset, you may have to rebuild that cash buffer — and while it is gone, you are paying interest on a larger balance. ASIC highlights this as a factor people overlook.
- Features you actually use. ASIC suggests checking you are not paying for features you never use. Conversely, if you do rely on something — flexible redraw, a specific offset structure — make sure the new loan has an equivalent, or price in the cost of replacing it.
- Repayment frequency changes. Moving from fortnightly to monthly changes how interest compounds between payments. Make sure the new loan supports the frequency you actually use.
- Cashback is not a discount. ASIC notes there are many incentives to switch and advises doing the maths to make sure a cashback still leaves you ahead over the long term once interest and fees are considered. A one-off payment against a permanent rate and fee change has to be weighed against the whole remaining term — not added to it.
How to add it up
Get a real number for every fee you can find, put a generous estimate on the ones you cannot yet price (LMI, valuation), and total them. That total is the number your per-period saving has to earn back. If you are not sure of a figure, use a higher number rather than a lower one — a switch that only works with optimistic costs is not a switch that works.
Once you have the total, divide it by the difference in each repayment. That is your break-even point, and it tells you how long you are committing your money before the switch pays for itself.
Do the arithmetic before you get attached to a rate. The calculator has a field for each cost category here. Fill in your numbers and it will total them, then tell you how much you save per repayment, how long until you break even, and what you are left with over the whole term.