Switching home loans? Hidden costs of transferring to another bank
Refinancing your home loan could save you thousands of dollars in the long term, but it pays to be mindful of the hidden costs of switching your mortgage.
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When switching mortgage to another bank, known as refinancing your home loan, you can make significant savings on the interest rate and fees, giving you cheaper home loan repayments each month. But before you make the switch, you need to make sure you're aware of the costs involved.
While you may have found a new lender with a cheaper interest rate, lower ongoing fees, or better features compared to your current mortgage, refinancing can have a few hidden costs in the process. Here's how to make sure you're actually moving to a better deal.
common costs of switching mortgages
- 1. Lenders Mortgage Insurance (LMI). When you switch financial institutions, the new lender may require a new property valuation. If your new valuation is lower than expected, you may be required to pay lenders mortgage insurance. To avoid this, your loan amount must not be higher than 80% of the new valuation (meaning you have a deposit or equity of at least 20%). If not, you could potentially be adding a significant amount of money to the cost of your loan, as LMI can be thousands of dollars. Ask your bank or mortgage broker for an upfront valuation before proceeding with your refinance application, to ensure that your LVR is 80% or below.
- 2. Mortgage Discharge Fees. Check your loan agreement to see if your lender charges a discharge fee when you close your home loan account. This could range from $150-$500. There are also government charges to end a loan contract, so expect to pay up to $1,000 in total to close your current loan agreement.
- 3. Break Costs on Fixed Rate Loans. When you break a fixed-term loan, your financial institution will charge you a fee for not fulfilling the agreed terms. The amount you pay is based on how much money/profit the banks stands to lose by you ending the fixed-rate loan contract. It will vary according to the interest rate your fixed loan was secured under, the current interest rate and the duration of your loan. This fee can be thousands, or even tens of thousands of dollars.
- 4. Switching fees. This is a fee you may have to pay when refinancing internally (staying with your current lender but switching to a different mortgage product). You can pay a switching fee of between $250-$650 to 'switch' loan products. It's always worth asking your lender if they're willing to negotiate on this.
- 5. Direct Debits. One of the biggest frustrations when switching lenders can be reorganising any direct debits from your nominated account. If not done well, you could be hit with “over the limit” and payment dishonour fees. These are usually $10-$25 each.
- 6. New Application Fees. Your new mortgage may incur upfront application fees and mortgage registration fees. Application fees typically range from $400 to $750 (sometimes your new lender may waive this fee altogether) and mortgage registration varies per state, but they can be as low as $100.
Refinancing costs estimate
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|
Sometimes, the fees and charges involved in switching your home loan can work out to be more than you stand to save.
For instance, if you've found a lower interest rate home loan and you are set to save $500 per year in home loan repayments by switching, but it's going to cost you $1,500 in fees to refinance, then it may not be worth making the move.
Make sure you understand all the costs involved before you refinance. If you get a low-rate home loan with a cashback offer (often $2,000-$4,000), this might make the cost of refinancing far more attractive.
If you're interested in switching to a cheaper or better home loan, then start comparing your options in the table below.