You saved up for the deposit, did all the paperwork and scored yourself a home loan. Congratulations, all your hard work has paid off! But what happens if after a month, a year or a decade you realise your home loan situation is no longer the best fit? Whether you didn’t score yourself the best possible mortgage rate at the time or your financial circumstances have changed, it’s a common scenario.
The good news is, you’re not locked in for life. At any time, you can refinance and switch over to another home loan. But what are the costs of refinancing, and how do they stack up against the benefits? Here, we give you the lowdown on everything you need to know about refinancing your home loan.
What’s involved in refinancing your home loan?
Generally, the objective of refinancing is to find another mortgage with a lower interest rate or repayments. So, the first step is to speak to your current lender to see if they have a more competitive option. This may include discounted interest rates or waived fees.
You should also look around at the rates and specials offered by different lenders, as well as the costs involved in switching over.
Approval can take anywhere between a day to eight businesses days. From there, your new lender will communicate with your old lender to let them know you will be exiting, and take care of any necessary steps like title transfer. Or, if you’re staying with the same lenders, they’ll switch over your mortgage. Then, you will go through the settlement process again, just like you did with your original home loan.
What fees do you have to pay when refinancing?
So, what costs are involved in refinancing a home? And is there a penalty to refinance your mortgage? Here’s the breakdown:
Discharge: While early exit fees are no longer a concern for those looking to refinance, you will typically need to pay a discharge fee to your old lender to close down the loan. This ranges from between around $100-$200 and the details of the discharge fee can usually be found in your initial loan contract. If you have a fixed rate loan, you may also need to pay an extra break fee for ending your loan during that period.
Setup fees: Your new lender will charge you an application fee to cover processing your documentation. This generally includes the application fees, valuation fees, mortgage registration fees and settlement fees. Mortgage registration fees will usually cost around $120, a bank valuation fee will cost around $220 and application fees will usually cost around $500.
Title insurance: If you choose to do a fast-track refinance, you may also be asked to pay title insurance to cover the period before your property title is officially transferred, which can set you back around $500 to $3000. However, some lenders will cover this cost for you.
Lender’s Mortgage Insurance: If you’re refinancing a larger loan or haven’t yet accrued 20% equity on your current loan, you may also need to pay Lender’s Mortgage Insurance (LMI). Your lender will sometimes carry out a new property valuation on your property. If you’re valuation is low, lenders will be likely to make you pay lenders mortgage insurance. Before choosing to refinance, be sure to ask for an upfront valuation as a precaution to avoid paying this extra and often costly fee.
All of these fees can add up quickly, so it’s important to determine upfront what you’ll owe to avoid any hidden costs.
Why does refinancing cost so much?Refinancing your mortgage may seem like a large up-front investment. This is because you’re dealing with two different lenders, who both charge their own fees. However, for many people, these initial costs are outweighed by the amount they would need to pay in interest fees if they didn’t refinance.
Do you pay stamp duty when you refinance?
You may have to pay stamp duty if you are refinancing. The stamp duty will usually amount to 0.35% of the loan and will include GST, but this will vary between states. You may be liable to pay stamp duty if you increase the amount of your loan during the process of refinancing or name of the borrower is changed. On top of these costs, you may be charged with a mortgage registration fee for switching to a new lender.
Can I refinance my mortgage with no closing costs?
Yes, some lenders offer no-closing cost refinancing, but the trade-off is normally a higher interest rate which affects your total mortgage balance. This is because a borrower will pay closing costs in order to pay for the title searches, title insurance and application fees. By paying a higher interest rate, you will end up covering these costs. While it can be tempting to reduce your up-front costs, be sure to ask how it will affect your total mortgage repayments.
Do you have to pay title insurance again when refinancing?
When refinancing, your old lender will need to transfer property ownership to the new lender. This involves title insurance costs, which is often paid by the lender. However, some lenders do charge you a title insurance fee, so be sure to ask about it from the get go. The process of transferring ownership from the old lender to the new lender can take up to two weeks, and insurance will be able to act as a safety net in circumstances where the property has not been transferred properly.
What are typical title fees for refinancing?
Title insurance can cost anywhere between $500 to $3000 for fast track refinancing and will typically paid before the title is officially transferred. Most mortgage providers will also need to do a title search, to confirm you own the deed to the property but this only costs around $30.
Which bank or lender is good for refinancing?
The best bank or lender is always the one with a home loan that fits your individual financial needs. To ensure you’re getting the best possible deal, it’s a good idea to talk to your current lender first.
Different banks offer different refinancing incentives. For example, Commonwealth Bank offers a $2000 cashback bonus when you apply by 6 April 2020 and fund by 12 June 2020 for loans that are $250,000 and over. This applies to:
- Owner occupied home loans with principal and interest repayments only
- All investment loans
- All Viridian lines of credit
- Excludes bridging loans and interest-only owner occupied loans.
What are the advantages of refinancing?
So, is it smart to refinance your home loan, or a big mistake? Well, there are plenty of good reasons you might refinance your property. Many people choose to do so to reduce the interest rate on their existing home loan. This can lower your monthly repayments and allow you to build equity in your home at a faster rate.
Or vice versa, they may want to switch from a fixed rate to take advantage of the lower insurance rate that normally comes with a variable home loan. As we’ll cover later, some people also choose to refinance and take cash-out, which allows them to borrow against the equity in their home.
Do I need a lawyer to refinance my mortgage?
To ensure your home loan is legally-binding, your broker or lender will typically enlist a solicitor to prepare your loan documents on their behalf. These are sent to the solicitor for them to review, and back to you to sign. This is to ensure the whole legal transaction will run smoothly and will mitigate the chance of any legal dramas in the future.
You can also approach a lawyer yourself for legal advice on your mortgage and assist you to manage the various channels of correspondence that will be involved in the refinancing process.
What documents do you need to refinance your mortgage?
The process of refinancing can be complex and one that you are not familiar with. For those who are new to refinancing, you are probably wondering what kind of paperwork and documents you need to provide to your lender. Many of these will be similar to the documents you provided when you applied for your current mortgage. Typically you will be asked to provide:
- Proof of identity, including passport, driver’s licence and/or birth certificate
- Proof of income, including payslips and/or tax returns
- Records of living expenses and debts such as credit cards or other loans
- Your current home loan statement
- Mortgage documentation like the loan period, financial penalty for exiting early and the date of the loan’s commencement
How soon can you refinance?
There’s no minimum term to refinance your home – you can do so within the first year. However, you may find some lenders will not refinance a mortgage they issued to you within the last 120-150 days, in which case you will need to wait or go elsewhere. The actual refinancing process can take anywhere between three days if you choose a lender that offers a ‘fast-track’ process or up to four weeks if you go with the standard process.
When’s the best time to refinance your home?
There’s no definitive right or wrong time to refinance your property. However, there a few things to take into consideration to make sure it’s worth the cost and effort at this point in time. Firstly, you want to look at how much equity you have already built in your property. This is the difference between the value of the home and how much is still owing.
Generally, you will be in a more favourable position to refinance when you have at least 20% equity in your home. This is because the lender will generally see you as lower risk and provide you with a better deal. It’s also a good idea to find out whether you will need to pay for Lenders Mortgage Insurance again. This can easily add up to thousands, which can outweigh the benefits of switching your home loan.
How often should you refinance your house?
According to the Australian Bureau of Statistics, there has been a decrease in the total value of home loan switching commitments were down 2% in November 2019 from $9.83 billion to $9.63 billion. You should only refinance when your current home loan terms are no longer serving you. If you’re happy with your lender, there’s no reason you have to make the switch.
What is cash-out refinancing?
You may be wondering ‘should I do a cash-out refinance?’ This is when you borrow against your home’s current equity. This can generally be used for whatever you like, whether it’s renovations, a new car, a wedding, education or another property — but only up to a certain amount. Generally, most lenders allow you to borrow 80% of the value of the property, minus the debt that you have left to pay. A cash-out refinance may be a good option for you if you are able to invest the money into something that will pay off in dividends, such as renovating a property to increase its value or negative gearing on an investment property.
Do you need an appraisal to refinance?
Most lenders will issue a valuation (not an appraisal) when you apply for a home loan and refinancing is no exception. Unlike an appraisal, this is legally-binding and must be carried out by a qualified professional. Valuations are usually far more detailed than appraisals, which are primarily carried about to give real estate agents an idea of a property’s value. The purpose of the valuation is to get an unbiased evaluation of your home’s market value, to help the lender determine their risk in lending to you.
What do valuers look for when refinancing?When inspecting your home, valuers are generally looking at the location, type and size. They also pay attention to its age, condition and any zoning restrictions.
How can I increase the appraised value of my home for refinance?
Something as minor as cracks in your walls or an untidy garden can affect your property valuation and as a consequence, affect the success of your refinancing application. Some ways you can score better on your property valuation include:
- Making sure your property is clean and well-presented
- Doing any necessary minor repairs around the house
- Replacing worn out carpet and flooring
- Applying a fresh coat of paint where necessary
- Keeping the lawn and outdoors areas tidy and free from clutter
- Ensuring there is plenty of storage areas in the home
- Decluttering your house
What happens if my valuation comes back lower than expected?
A low valuation can make refinancing more difficult for property owners. In fact, a study by online lender State Custodians showed that one in seven home owners were unsuccessful in refinancing their mortgage because the value of their property had fallen.
However, this doesn’t necessarily mean you’ve reached a dead end. In this scenario, you should seek a second opinion on the value of your home. You may want to consider making the touch-ups recommended in the previous section. It can also help to be present for your valuation, so you can answer questions about anything that isn’t immediately clear.
Updated by Vidya Kathirgamalingam March 2020
Now that you know the costs of refinancing as well as the benefits, you can make an informed decision as to whether it’s the right choice for you. Whether you’re buying your first property or want to make the switch, eChoice’s mortgage brokers can help you compare hundreds of home loans to find a suitable option.