Switching home loans? Hidden costs of refinancing
There are costs that come with switching your home loan. Calculate your switching costs and work out how to save money along the way.
For most borrowers, the savings that come from switching home loans far outweigh the costs that come with discharging one loan and setting up a new one.
But that's not always the case. Borrowers on fixed rate loans, or who have little equity built up in the property, risk paying hefty penalties for refinancing. The smart refinancer calculates their switching costs before making the move to a new loan.
5 common costs of switching home loans
- Mortgage discharge fees. Some lenders charge a fee when you exit a loan for any reason. It's usually a few hundred dollars. Check your loan contract or ask your lender.
- Mortgage registration fees. State and territory governments charge a fee to register a new mortgage. It's usually $100 or slightly more.
- New application fee. Your new lender may charge you an application fee or settlement fee. Some lenders charge between $400 and $600 for this. Some lenders don't charge you a cent.
- Break costs on fixed rate loans. When you break a fixed-term loan, your lender charges a complicated fee. This fixed rate break cost is determined by the length of your fixed period, your loan amount and current market rates. Ask your current lender for a break cost estimate before refinancing.
- Lenders mortgage insurance (LMI). If you bought a house with a deposit below 20%, your original lender would have charged you lenders mortgage insurance. If you refinance, your new lender could charge you for LMI again if your outstanding loan debt is still more than 80% of the property's value (meaning your deposit, or now equity, is still under 20%). LMI can cost thousands or even tens of thousands of dollars.
How to estimate your refinancing costs
To give you a clearer example of the costs above, we've broken down an example estimate of the fees you may face when refinancing your mortgage. Note that these fees can vary from one lender to another.
|Mortgage deregistration fee||$120 (varies according to state)|
|Mortgage registration fees||$120 (varies according to state)|
|Bank valuation fee||$220|
|Title search fee||$30|
|Preparation of mortgage documents||$100|
|Total refinancing costs:||$1,325|
How do I minimise my switching costs?
Why pay more to refinance than you need to? There are some easy ways to make switching cheaper.
Look for a new lender with low fees
A low interest rate is always the most important feature of a mortgage. But finding a loan with low fees is a good idea too. Many lenders now offer loans with no upfront fees at all.
Don't refinance until you have 20% equity
It's probably not worth refinancing if you have to pay LMI. You're better off making loan repayments, checking the value of your property (hopefully it's higher than when you bought) and waiting until you own at least 20% of the property.
Then you can refinance without paying thousands in LMI premiums.
On a fixed rate? Maybe wait
Breaking a fixed rate loan can cost hundreds, or possibly thousands of dollars. If you're nearing the end of the fixed period the break cost will be smaller. Refinancing could still be a cost-effective move.
But if you have a big loan and you fixed for several years to come, your break costs could wipe out the savings that come from switching. You may have to wait it out.
A refinance cashback can cover switching costs
Many lenders now offer cashback deals to attract refinancers. Home loan cashbacks are worth between $2,000 and $4,000. This should offset most of your switching expenses.
But don't let the cashback figure cloud your judgement. The extra cash is nice, but you need to make sure the new loan is a suitable one for you.
Is it easy to switch home loans?
Refinancing your home loan sounds like a big task, but it's often easier than applying for your first ever home loan. If you've been making repayments, you've demonstrated to potential lenders that you're a responsible borrower.
Refinancing involves 7 steps (and if you're reading this guide you've already started):
- Look at the cost of your current home loan.
- Ask your current lender for a better deal.
- Check out how much it will cost to exit your current loan.
- Compare home loans.
- Look at the costs of moving to the new lender.
- Apply for your new home loan.
- Exit your old loan.
Check out our in-depth guide to every step of the refinancing process if you need more help.
How long does it take to refinance?
Not as long as you might think! Check out a video of one borrower's refinancing story.
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