February 8, 2017
The number one reason that people refinance is to get a lower rate on their mortgage. A cheaper loan can translate into huge savings over the course of your mortgage term.
A report by JPMorgan Chase found that one-third of mortgage loans today are refinanced. The numbers of borrowers refinancing have been steadily increasing for more than two decades, and have spiked over the past year to extremely high levels. This is causing a shift in the Australian mortgage market. Lenders recently have been more competitive than in previous years in order to attract borrowers who are interested in refinancing and to capture this growing segment of the market.
Rates are still competitive today and if you are paying more than 4.5 percent, then you should be able to get a cheaper loan. It is still possible to find rates as low as 3.44 percent.
Depending on how much cheaper your loan is and the details of your financial contract, you will be able to recoup your fees to refinance within a few months to a few years.
As long as you plan on keeping your mortgage for a longer period of time than it would take to recover the fees for refinancing, then it is worth it. In order to be a smart borrower and to make the best decision for your unique situation you will have to do the math.
- Add up the total fees you would pay.
- Compare it to how much you will save each month from refinancing.
- Look at how long it will take to make it worth it.
Here are some of the fees you may have to pay when you refinance:
- Loan origination fee 1 percent of the principle balance is standard
- Mortgage application fee
- Documentation preparation
- Appraisal report
- Title search
All of the fees together will roughly add up to about 1.5 percent of your principle. For a $500,000 mortgage, your closing costs would be about $7,500.
With the rate change described earlier, it would take just over four years to recoup your fees. A rate change of closer to 1 percent would take even less time to recover.
Currently, the major banks and some of the non-bank lenders are shifting towards more conservative lending in order to increase their own capital flows to meet stricter regulatory requirements. This means borrowers with a high, steady income and lots of equity will have a much easier time negotiating favourable terms when refinancing. Others may discover that tougher requirements, such as higher initial payments and fees, make refinancing more expensive than they expected.
For example, if you are refinancing after only a couple of years, which means most of your mortgage repayments have gone towards paying off the interest with less going towards paying down the principle amount, you may not have the 20 percent equity that you need to avoid paying lenders mortgage insurance, or LMI. This is even more likely if you had put down a small down payment for the original loan or if your property value has gone up. LMI can eat up a large chunk of the money you would save by refinancing.
With some lenders still offering low rates and many available deals, especially for premium borrowers, it pays to explore your options when in the market to refinance your loan. Look for the best rates and be sure to talk to a home loan expert about your options. Remember, the more you save, the faster you can pay off your mortgage!
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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