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With industry experts predicting further interest rate rises, exploring the potential benefits that refinancing your mortgage may deliver is on the minds of many Australians.
But what is the real cost of refinancing your mortgage? And is it worth it?
To help you decide if refinancing your home loan is right for you, it helps to understand the process – and the potential fees and charges associated with refinancing.
What does it cost to refinance your mortgage?
In some cases, switching to a new lender does have the potential to help you save, by accessing a more competitive interest rate, shorter loan term, or improved loan features.
But it’s important to understand that refinancing can attract a range of home loan fees. Deciding whether these fees balance against the money your new home loan may be able to save you is all about crunching the numbers and getting advice from a trusted specialist.
Different lenders offer different fees and charges, but by accessing comparison data, you can dig into exactly how much switching your home loan may cost.
Understanding types of home loan refinance
If you do want to refinance, there are two types of refinancing available.
1. Internal home loan refinance
This type of refinancing arrangement is done within your existing lender and is about changing to a different home loan product.
2. External home loan refinance
If you choose the pathway of external home loan refinance, you’ll be switching lenders. This usually means there will be some costs associated with taking on a new loan, as well as exiting your existing mortgage.
What refinancing fees are there?
Figuring out the exact fees related to refinancing is personal and depends on your own circumstances. Some common refinance costs to think about may include:
Discharge fees: This is an administration fee that is paid to the lender you plan to leave – covering the costs of paying out your existing loan and finalising your mortgage
Application fees: Making any new loan application typically attracts fees. Just how much depends on the chosen lender but may range from $0 to $1000
Valuation fees: Obtaining a new valuation fee for your new lender will typically attract a fee. But because an up-to-date valuation on your property is a pivotal part of the security component of your mortgage application, valuation can’t be avoided.
Land registration fees: These fees remove the existing mortgage from your current lender and take care of all the registration processes that connect your new mortgage to your new lender.
Lenders Mortgage Insurance (LMI): If you’re only contributing less than 20 per cent equity in the property you are getting refinanced, you may get charged lender’s mortgage insurance (LMI). Because LMI reduces the risk to the lender, it makes them more likely to approve your loan application, even if you don’t have a large deposit. LMI insurance offers your lender protection against potential default. It’s worth noting that you may be slugged for LMI on refinancing, even if you paid a premium for LMI when you took out the original home loan on the same property.
Ongoing fees: Depending on the type of mortgage product you’re applying for, you may be charged an ongoing fee by your new lender. These vary from lender to lender but may start at $0 and climb up to more than $400.
Break fees: Got a fixed rate home loan? A contract break cost may hit you with a fee to refinance during the fixed period – depending on your lender. Basically, it’s a type of compensation to protect the bank from losing potential profit (heaven forbid!). The state of interest rate movements will determine whether or not a break cost is charged.
What’s the average cost to refinance a home loan?
Refinancing costs vary wildly from lender to lender and also depend on your specific circumstances.
At the bottom end of the scale, refinancing fees could be as little as $75.
Expect an average ballpark figure of around $800, with top-end refinancing fees rising to $2000-plus.
Start a conversation with your current lender
Getting accurate information about how much it costs to say goodbye to your current mortgage starts with your existing lender. They are the best source of information that is relevant to you and your circumstances and they’ll be able to clear up any confusion about exit fees and charges.
The bottom line
Refinancing your home loan isn’t just about rates. Extending or shortening the life of your loan may be critical for you. Or maybe accessing specific features your current lender can’t offer makes the change worthwhile, despite the fact there may be associated costs.
Make sure you talk to your lender about stamp duty exemptions too. If not, depending on what state or territory your refinancing transaction is in, you may find this unwelcome expense strikes again.
Although the list of potential refinancing-related costs may seem long, if you are unhappy with elements of your current mortgage and want to explore greener pastures, it could be a positive long-term decision.
For example, if you refinance with a view to save $200 each month, but the costs connected to your refinancing add up to $4000, you can expect to reach the break-even sweet spot within 20 months. And with many more years probably still to go on your home loan, that might be a significant saving, despite the initial added expense.
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Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
