December 7, 2017
What’s the primary factor which drives Australians to refinance? To save money, of course.
Now, in most cases, switching to a new mortgage could help you save, either in terms of interest, lower repayments or both. However, refinancing home loan fees can take a huge chunk out of those savings.
Depending on the terms you and your lender establish, you may not realise any cost savings until years into your new loan term – about the time you may decide to refinance again.
You may be wondering, how can I make my refinanced mortgage worth it, even with all the fees I’ll have to pay?
When you understand refinancing closing costs, and all the little (and big) extras you may have to fork out, you can start to make smarter decisions about the new loan you choose and about when you opt to refinance.
The mortgage market is one of Australia’s biggest and most important capital markets – in 2015 it was worth $1.4 trillion. Here’s the kicker – the majority of home loan transactions aren’t for new purchases. They are for existing customers looking to change to a new home loan. Refinancing is big business for good reason. It offers homeowners and investors the ability to continually improve their mortgage in order to cater to their personal financial changes, and to capitalise on shifting market interest rates.
The bottom line is, refinancing is worth it. How much worth you derive from it is up to you. Your level of understanding in refinancing mortgage costs has a lot to do with what you can get out of the experience. When you know how much it is likely to cost, you’ll be able to make a wiser assessment as to whether that half point interest rate reduction or new line of credit home loan is such a good idea.
So, how much does it cost?
It depends. The exact fees will vary from one lender to another. Also, depending on the terms of your current mortgage and whether you are switching lenders or not, there are some costs, like home loan exit fees and application fees, you may be able to avoid altogether. And then there’s the biggest cost – lender’s mortgage insurance – which you may not have to pay at all when you refinance.
As a general benchmark, at best, refinancing can cost between $1,000 and $2,000. However, paying between $2,000 and $5,000 is not uncommon, with some borrowers paying even more. The amount you could potentially save if you reduce the rate on a 20 or 30 year loan can still easily dwarf the higher end of the spectrum for refinancing costs.
So, what’s your best bet for success?
- Write down all the potential fees and add them up.
- Use a mortgage refinancing calculator to estimate how much you could save every month and each year with your expected new interest rate.
- Compare the difference.
Once you go through these steps, you’ll have a better idea of how much it will cost you to refinance compared to what you could save for your unique set of circumstances.
When refinancing a home loan, there are a range of possible fees that will vary by lender, the state you are refinancing in, the nature of your exit from the previous loan, and the terms of the new loan. Keep in mind that not all lenders will include all of these fees, and some will be negotiable.
Discharge fees. Also known as exit fees, generally ranging from $100 to $300. Lenders are no longer allowed to charge these fees in Australia. As long as you took out your loan on 1 July 2011 or after, this is one refinancing expense you won’t have to pay.
Break costs. Similar to exit fees in that this is a charge for leaving your loan, break costs are charges incurred for leaving a fixed rate loan during the fixed period. Most banks use a formula to determine the break costs so you’ll have to check with your lender. This is one fee that can be substantial. However, if you can save a lot by switching to a cheap variable rate loan, it may still be worth it.
Mortgage registration fees. And mortgage deregistration fees. These will vary by state but are generally from $120 to $150 for registration and for deregistration.
Application fee. This is the fee you’ll have to pay to apply for your new home loan, just like the one you paid when you applied for your existing mortgage. Some lenders will waive this fee if you refinance with them. Application fees usually range from $300 to $800 or more.
Settlement fee. Sometimes a fixed fee, this is another mortgage lender fee used to cover the costs of the transaction. It is intended to pay for the work done to settle your loan. Expect to pay from $75 to $150.
Valuation fee. Your property needs to be inspected by your new lender. Banks may charge from $200 to $300 to conduct the valuation, although some banks will cover this expense.
Lender’s mortgage insurance. Just like when you took out your existing mortgage, you may have paid lender’s mortgage insurance. This is a lump sum insurance payment to insure your lender against the risk of lending to you. It is generally charged if you are borrowing more than 80% of the property’s value. LMI can easily cost you thousands of dollars.
There are some ways to offset or even avoid some refinancing home loan fees. This is where it’s important to carefully compare the terms of your old loan to those of the new. For example, if your new mortgage doesn’t come with any monthly account fees but your old loan did, you’ll save on these ongoing charges. Depending on how competitive the market is, some banks will offer rebates if you refinance with them. A $1,000 or $1,500 rebate to refinance can greatly offset the money you have to pay to cover all your refinancing fees.
You can also ask to negotiate some fees, such as the valuation fee and the application fee. Here’s the way to do this; research what other lenders are offering. If you let the lender know that your other potential options are willing to waive the application fee, they may be more likely to do the same. They’ll be more willing to lower or eliminate fees if they know you can get a better deal somewhere else.
Consider refinancing with your current lender, also known as an internal refinance. Often your current bank will give you a fair deal on fees to keep your business.
And finally, make sure you aren’t going to have to pay lender’s mortgage insurance when you refinance. Keep in mind, the value of your property may have changed since you took out your mortgage, which will change your loan-to-value ratio.
When you account for all potential fees – as well as how you can reduce or offset them – and compare your total costs to what you could save, the decision on whether to refinance right now or not becomes a lot simpler. It takes a few calculations but the more informed you are, the more you can get out of the mortgage refinance process. Get started on your refinancing report today.
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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