Refinancing Costs and Benefits

There can be some fantastic benefits in refinancing your home loan - just make sure you weigh up the different expenses that can be involved in the transfer to make sure it’s the right choice for you.

Key costs of refinancing

Depending on your circumstances, not all of these will apply. It’s worth having a chat with a Mortgage Choice broker to explore the costs involved with your individual situation, and balance these with any potential cost savings of switching home loans.

  • Exit Fees

    Exit fees may apply when you pay out a loan early, usually in the first three to five years of your term. It could be a percentage of the remaining loan balance or it may be a set charge. Check your loan contract for more details.

    Although exit fees have been banned on new loans taken out after 1 July 2011, they could still apply to loans taken out before this date.

    Worth knowing: Exit fees don't include break costs, which can be imposed if you bail out of a fixed rate loan before the fixed term expires. It’s worth speaking to your Mortgage Choice broker if you are thinking about refinancing a fixed rate mortgage.

  • Borrowing costs

    When you refinance, your new lender may charge a range of upfront fees. However not all lenders charge these fees and some may be negotiable.

    They may include:

    • Loan application fee - charged when you apply for a new home loan
    • Valuation fee - your lender may charge a fee to have your property valued by a professional property valuer
    • Settlement fee - your lender may charge a fee to pay out your current mortgage
  • Lenders Mortgage Insurance

    LMI is a type of insurance designed to protect the lender, not the home owner, if you cannot keep up the loan repayments. It applies if you borrow 80% or more of your home's value and isn't transferable between lenders. This means that even if you paid LMI when you first purchased your home, chances are you'll be asked to pay LMI again when you refinance.

    You may be able to capitalise LMI (add it to the loan) though you need to be careful that this won't push your level of borrowings over the lender's preferred 'loan to valuation ratio' (LVR) - the amount you borrow as a percentage of your home's value.

  • Stamp Duty & fees

    Some states charge a tax on your mortgage which is known as stamp duty, which is calculated on the amount of the loan. If you increase the size of your loan when refinancing, stamp duty may be payable.

    You may also need to pay a Mortgage Registration Fee which is imposed by the Land Titles Office (or equivalent) for registering your mortgage onto the title record for the property.

Doing the calculations

Here's an example. Let's say Sue has a $300,000 loan repayable over 25 years. Her current rate is 6.4% and her monthly repayments are $2,006.

If Sue can refinance to a loan with a rate of 5.9%  a rate reduction of 0.50%, she can lower her repayments to $1,914  a saving of $92 each month.

Looking at the cost side of things, we'll assume Sue will pay $1,000 to refinance her loan. In this case it would take about 11 months ($1,000 divided by $92) for Sue to claw back the costs through the savings she makes. That's not a bad time frame. If it was to take several years to recover her costs, refinancing may not be worthwhile.

  • Offset accounts

    As a guide, if the linked account has a balance of $10,000 and your loan is worth $300,000, interest will be based on a loan of $290,000 ($300,000 less $10,000). This makes an offset a great way to put personal savings to work to pay off your loan faster. Be aware, offset is a feature that may not be available on low rate basic loans so you need to weigh up if the value of your savings will be sufficient to make up for a higher loan rate.

  • Lower variable rate

    Refinancing can come with some costs so it is essential to weigh up the savings of refinancing against the expense involved. As a guide, if you can trim 0.5% from your home loan rate, refinancing is likely to put you in front financially. But be sure to crunch the numbers for your particular situation or ask your Mortgage Choice broker to do the sums for you.

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