Refinancing your mortgage could save you a lot of money if you do it right. But, if you rush into it, you could find the unpredicted costs of refinancing turning your dream of obtaining more financial freedom into a real nightmare.
So, how can you overcome this monetary minefield? You can avoid problems when refinancing, by looking at your existing home loan contract, reading the terms and conditions of any new loan before signing, and then calculating refinancing costs.
Having said this, what are the costs of refinancing your home loan? Here is a list of costs to look out for, and some tips to help you avoid these sometimes-excessive fees.
What Are Exit Fees?
Some home loans come with automatic exit fees if taken out before 1 July 2011 or break costs if on a fixed term. Consequently, this means that you will pay a fee for ending the loan before its full term. These fees can be hefty, costing thousands of dollars in some cases. Thus, it’s vital that you look at your contract to see exactly what your lending agreement is before making any move.
Depending on the type of loan you have, exit fees are either:
- A set flat rate.
- A percentage of the remaining portion of the loan.
Home loans taken out after 1 July 2011 that are variable will attract a discharge fee. This cost is associated with the release of your property title. Also, lenders can charge an early discharge fee on specialist loans, or those that lenders say come with lower rates. Some of these costs are as follows:
- Westpac charges $350 per loan in discharge costs for the Rocket Repay home
- Commonwealth also has a discharge fee of $350 per loan on their Standard Variable and Base home loans but have no fee for their No Fee home loan.
- NAB charge a $350 settle fee per loan on their Tailored home loan.
- ANZ charge a $160 discharge fee on top of any government fees to lodge paperwork.
To ensure a good deal on a new mortgage, calculate exactly how much it will cost you to exit your home loan. Then, include this in the costs of refinancing.
What is Lenders Mortgage Insurance?
LMI, or Lenders Mortgage Insurance, is a lender fee 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, and you’re seeking to refinance, then it’s vital to ensure that you have enough equity in your property to avoid paying LMI. If you don’t, LMI can make your monthly payments uncomfortably larger, which will negate the benefits of refinancing.
So, how much can LMI actually set you back? Let’s look at an example.
If you buy a home worth $520,000 and have a deposit of $60,000, you’ll need to borrow $480,000 or a loan-to-value-ratio (LVR) of 92.31%. Consequently, your LMI will be $15,984. However, if you reduce your LVR to 85%, you’ll pay just $5,083 in LMI. But, you’ll also need to find an extra $38,000 for the deposit.
To avoid this refinancing cost, you will need to cover at least 20% of the new mortgage. Alternatively, you could wait until the value of your home increases again.
What Costs More? Fixed or Variable Interest Rates?
When comparing fixed and variable rates, it’s important for you to consider your circumstances. Variable rates give you greater flexibility and come with features that allow you to reduce your repayments. Thus, these features effectively enable you to have greater control over negating rate rises. Fixed rates, on the other hand, give you greater financial certainty, but they often don’t come with money saving features. Plus, if you exit the loan early then, you can incur hefty exit fees. Let’s look at the financial costs of both loans now.
- LMI can cost thousands if you need to borrow more than 80% of your home value.
- Discharge fees ranging from $150 to $500.
- Application fees varying from $400 to 800.
- Mortgage registration depending on the state of purchase $100 to $400.
- Existing loan exit fees, if variable, range between $160 and $350.
- Discharge fees if fixed can cost thousands.
What Should I Consider Before Refinancing?
Before you look to refinance you need to consider the following:
- How long you’ll live in your existing home for – are you considering having more children, moving interstate, or looking at getting a new job? If so, then stay with your existing lender until your financial situation is more secure.
- Know what all the fees and refinancing costs are and then calculate if you’ll actually save money long-term.
- Looking for a competitive rate with a lender that you’re likely to stay with for more than 10-years. Flirting from lender to lender every few years chasing the ‘best’ rate could prove costly. So, you need to find the right lender for your individual circumstances and then commit to them to reap the full benefits of refinancing.
Overall, refinancing is a promising option, if you’re careful, do your homework, and compare home loans. This strategy will allow you to understand all your expenses and total costs, assess your own personal and financial circumstances and for you to critically analyse your refinancing options.
Do you want to see if you can avoid some of the costs of refinancing? Then contact eChoice, we can help you understand the charges. Plus, our brokers have access to 100’s of products, so we’ll find you a competitive mortgage.