With restrictions upending auctions and open houses, and unstable personal finances causing a massive dip in lending investments and new owner-occupier loans, lenders have taken a big economic hit from the COVID-19 crisis.
Fortunately, the mortgage industry has had a saving grace in the unprecedented refinancing bonanza occurring Australia wide. According to the Australian Bureau of Statistics housing finance date from the June quarter mortgage holders taking advantage of record-low interest rates has seen over $40 billion worth of home loans refinanced since March, and the ratio of external refinancing to total lending jumping from 26% to 43%.
The trend doesn’t look like it’ll be going out of style anytime soon, with some major banks offering further interest cuts in recent weeks. Tightening purse strings and banks offering upfront cash bonuses and flexible loan features to potential refinancers – this might be the time to consider refinancing your loan.
Refinancing is the process of taking out a new loan with your existing lender, or with a new one, to pay off your current loan – essentially trading in your old home loan for a better one. Refinancing applicants go through the same approval process they did when applying for their original loan and can be subjected to similar fees.
Besides the obvious savings from switching to a loan with lower interest rates, refinancing can have several other benefits and uses. Mortgage holders may benefit from switching to a variable or fixed rate, or simply want to move to a loan with more attractive features.
Refinancing can allow access to equity in your home that may be needed for an emergency or to finance renovations. Mortgage holders with high-interest personal loans can potentially save by consolidating their debt under their home loan’s lower rate. It’s also possible to shorten loan periods and reduce interest paid over the life of the loan. However attractive these benefits may seem, it’s important to first understand all the possible fees to ensure refinancing is the right financial move for you.
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The cost of refinancing a loan differs from lender to lender and state to state. The fees can vary considerably depending on the amount of equity in your home and whether you are refinancing internally or externally. Bank fees aren’t the only costs incurred in the refinancing process, as legal and government fees may still apply.
Just like when you applied for your existing loan, you will be entitled to pay a mortgage application fee. Also known as a set-up or start-up fee, the amount varies greatly from lender to lender. The average application fee ranges from $150-$995, but if you’re lucky some lenders will potentially wave the cost altogether.
Valuation is a key part of the refinancing process to understand the amount of equity in your home and to determine what kind of loan is right for you. The cost of valuation from a certified valuer ranges from $50-$420, and will sometimes be included in the application fee.
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Also known as a termination fee or settlement fee, a discharge fee is paid when closing down your old loan. Discharge fees cover the lender’s legal costs and can range between $75-$600.
If you’re existing loan was at a fixed-rate, you may be required to pay a break cost which compensates the lender for the possible losses incurred when you broke your contract. The amount is calculated depending on: the current interest rates compared to your loan’s rate, the time remaining on your loan and the amount you initially borrowed. Be aware that banks don’t always disclose their break costs or how they are calculated.
A switching fee is only required when refinancing with the same financial institution. The average switching fee is $300 but they vary from lender to lender.
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Settlement fees are paid to your new lender to cover the costs involved in paying out your previous loan and establishing the new one. The amount varies widely, with some lenders charging as little as $15, and others charging upwards of $650.
Just like when establishing the first loan, if you are borrowing more than 80% of the property value you may be required to pay LMI. The amount is dependent on the size of the loan, and the higher the percentage of the loan compared to the property value, the more you will pay. When refinancing, the equity in your home plays a similar role to a home loan deposit reducing the financial risk for the lender. Don’t worry about the upfront cost as most lenders allow for LMI to be incorporated into the loan.
Stamp duty is a government tax on real estate transactions, and the amount is dependent on which state you live in and the cost and type of your home. It’s possible to avoid paying stamp duty if you don’t increase the loan amount, borrow under the same name and choose to refinance with the same lender.
Click here for a the stamp duty policies for each state and territory
Another government fee, mortgage registration registers the property as security for the home loan. It allows for future buyers to view any claims that may have been made on the property and ranges from $116.80 to $187 depending on the state or territory. The fee is paid upon both registration and discharge of the loan.
Title insurance is specialised insurance that covers certain issues that may have been missed in the conveyancing process e.g. encroachment, zoning rights and illegal structures. Title insurance is tied to your mortgage, so once the old loan is closed, new title insurance is needed which can set you back anywhere from $500 to $3000.
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In order to confirm you own the deed to your property, your lender will conduct a title search. One of the smallest fees incurred when refinancing, a title search will cost you roughly $30.
Luckily, exit fees only apply for loans established before July 2011. If your loan predates the abolishment of exit fees, you may still be required to pay, with the amount dependent on your lender, your loan size, and the time remaining on your loan term. It won’t hurt to ask your lender to waive or discount the fee, or if they were one of the kind institutions who removed the fee from pre-July 2011 loans.
Like all big financial moves, refinancing takes time and effort. It’s not just the costs that need to be considered, but whether you have the time to commit to the process.
If you feel that refinancing is the right move for you, Refinancing.com.au can help you find a suitable option, all from the comfort of your own, soon to be refinanced, home. Our brokers will assist you with the process from end to end.
We can help find the loan that’s right for you, support you through the entire application process, and negotiate rates on your behalf. Ultimately, we make refinancing convenient, whilst offering some of the best rates on the market.
Words by Nell Matzen
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Get in touch if you are looking to apply for the scheme or if you’re unsure about your eligibility. Our home loan professionals can help you understand your options if you think a renovation could be in your future.