March 22, 2018
What’s the biggest mistake Australians make when refinancing? Not understanding the full costs of refinancing a home loan.
Switching to a new mortgage could save you a lot of money if you do it right. It may also help you meet other important financial and lifestyle goals like debt consolidation, paying for home renovations or investing. If you rush into it, however, the often unpredictable financing expenses can turn your refinancing dream into a real nightmare.
As of the beginning of 2018, Canstar found the costs of refinancing to range between $700 and roughly $3,800. Depending on how your new loan compares to your current terms and features, you can still benefit from refinancing, even if you end up paying the higher end of the spectrum. However, it will take a couple years of repaying your new loan to recoup your costs.
|Costs of Refinancing a Home Loan|
Source: Canstar. Data accurate as at 30/01/18. Data based only on standard principle & interest loans for fixed and variable terms.
Careful calculation beforehand can help you avoid unwanted and unexpected refinancing expenses. This means taking an in-depth look at what you may have to pay and weighing that up against how many months it will take you to come out even with your new loan. You can use ASIC’s MoneySmart’s mortgage refinancing calculator to help you get a clearer idea of the costs vs. the benefits and the time it may take to recoup your costs.
So what are the costs of refinancing your home loan? Here is a list of expenses and fees to look out for and some tips to help you avoid these sometimes excessive fees.
Some home loans come with automatic exit fees, which means you will pay for terminating the loan too soon. The fees can be rather heavy, costing thousands of dollars in some cases. Exit fees will be based on either:
- A set fee
- A percentage of the remaining portion of the loan
But, there’s good news. If you took out your mortgage in the past couple of years, you might not have to pay any exit fees. As of 30 June 2011, lenders have not been able to charge exit fees. This means any loan that originated on 1 July 2011 or after will not come with exit fees.
And bad news.
Unless you have a fixed rate mortgage. If you are repaying a fixed rate home loan, you’ll likely incur break costs for leaving your loan early, even if you took out your loan after 1 July 2011.
Look at your loan contract or call your lender to find out if you have to pay any exit fees. Then, figure out how much they will be, depending on if it is a set fee or a percentage of your mortgage balance. You may simply want to wait until the fixed rate period of your mortgage is over, and your loan switches to a variable rate loan before you refinance. This way, you can enjoy the benefits of switching to a better loan, whilst saving on some of the biggest fees.
LMI, or Lenders Mortgage Insurance, is charged when the borrower is taking out a mortgage for more than 80% of the value of the house (LVI). If your home has dropped in value recently, your loan-to-value ratio will also have changed, which means you may not have enough equity to be able to avoid LMI. This can make your monthly payments uncomfortably larger.
To avoid these refinancing costs, you will need to provide at least 20% of the new mortgage. If your home has decreased in value and you don’t have enough equity, consider waiting until the value of your home increases again. You’ll stand to gain a lot more from refinancing when you aren’t adding LMI to your refinancing costs.
The cost of switching loans is one of the biggest drawbacks of fixed rate home loans. Whilst the predictable repayments that come with a fixed rate can make budgeting a lot easier and can protect your loan from interest rate increases, fixed mortgages aren’t always the best deal in the long run.
- If there are considerable exit fees, the costs of refinancing could make changing loans not worth it.
- You’d have to refinance to a new loan with much lower interest rates to see any significant savings.
When replacing a variable rate loan, it is often easier to actually save money when refinancing. This is because with a variable rate, the interest rate, and thereby your mortgage payments, will fluctuate. Some homeowners choose to refinance simply to take advantage of lower rates when the standard rate falls. The money that is saved within a year, if it is enough of a change in interest rates, could easily offset the refinancing costs involved.
You always want to compare rates. Sometimes, other lenders will lower their rates, whilst you are still paying a higher rate with your lender because they haven’t changed their rates. This means you could be missing out on huge savings.
It is a good idea to check with other lenders to determine what kind of deals and refinancing costs might be available right now instead of assuming your current lender is offering you the best deal.
Before beginning the process or refinancing, you need to know:
- All the fees and refinancing costs involved
- The total cost of the mortgage over the entire course of the loan
These are the figures and costs of refinancing a home loan you need to calculate to understand whether or not you are getting a good deal.
While refinancing is often a promising option, you need to be aware of the costs of refinancing when thinking about getting a new mortgage. The fees may be excessive in some cases, but they can be avoided if you do your homework and search and compare home loans, and are clear on all your expenses.
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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