Learn how to calculate the costs of refinancing your home loan
Many homeowners are aware that they could save money by refinancing their home loan to a different lender. However, have you stopped to consider how much it will cost you to refinance?
The primary reason most people refinance is to reduce the amount of interest they're charged on their home loan and to minimise their repayments.
However, just because a home loan is advertised with a lower interest rate doesn't automatically make it a better option for you.
In some instances, it's possible for the costs to outweigh the benefits of refinancing. Regardless of how appealing a low interest rate may seem, it's important to work out what other costs may apply when switching lenders such as discharge and application fees.
Become familiar with the costs of refinancing to ensure that it's the right choice for you.
Refinancing costs estimate
Although switching home loans now is relatively straightforward, it is important to make sure you are aware of all the costs involved.
Below is a breakdown of the fees you may face when refinancing your mortgage.
|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|
A breakdown of the fees
Always check what application fees or establishment fees might apply to your new loan. Just because the interest rate is competitive doesn't mean the associated switching fees will be affordable. You may also want to check whether any other upfront fees apply, as many lenders will break these down into other terms. Look out for things like document preparation fees when reviewing the product details of your new mortgage.
Monthly account fees
It's a good idea to check whether you'll be paying any monthly account-keeping fees on your new home loan. Reducing your interest rate might be appealing, but if you're paying an additional $10 a month on top of your mortgage payment in monthly fees, this may outweigh your cost savings.
When you refinance your mortgage over to a new lender, your existing bank may charge you discharge fees to exit the loan. These will vary between lenders but could range between $150 - $300 so check how much you'll be paying to exit your current loan.
If you're currently in a fixed rate home loan and you want to refinance over to a cheaper variable rate mortgage, you may be up for break costs. These are calculated to cover any potential losses your old bank will make by you breaking your fixed term contract earlier than the agreed term. Call your current bank and ask them to provide you with a current payout figure. This will give you a clear idea of what break costs may apply if you decide to refinance.
Refinancing to a new lender requires the lender to conduct their own bank valuation on your property. Valuation generally costs between $200-$300. However, some lenders absorb the cost themselves.
Sometimes called legal fees or settlement attendance fees, this incorporates the costs to payout your previous lender and to switch the funds to your new mortgage. Settlement costs approximately $60-$200. Once again, settlement costs are sometimes absorbed by the lender and waived for customers.
Government fees vary from state to state. There are two general types of government fees for refinancing, these are mortgage deregistration and mortgage registration. The fees can cost between $100-$200 each.
Fixed vs variable
If you're thinking of refinancing from your current variable rate loan over to a fixed rate loan, think about what variable rate the new lender will be charging once the fixed term ends. Just because they might be offering a cheap fixed interest rate now doesn't automatically mean you'll benefit from the same savings once the term expires.
Look at our mortgage comparison calculator that lets you include a fixed term or introductory rate. Enter your figures into this and put the fixed rate in for however many years you want. Then add whatever their current variable rate is.
This calculator will let you compare your current loan to the new loan, giving you a clearer picture of whether the deal is worth proceeding with or not.
Doing the sums
Obviously, if you're going to save thousands of dollars in interest and reduce your monthly repayments at the same time, refinancing your home loan is worth the effort. But you need to be sure that making the switch will be financially viable for you before you sign on the dotted line.
Use our switching cost calculator and run your figures through this. You'll be able to estimate your total refinancing costs.
Top five features to look for when refinancing
Before you make the decision to refinance, think carefully about some of the loan features you want included in your new home loan. Depending on your borrowing needs, you may want to consider the following features:
1. Free redraw facility
If you've made additional payments into your mortgage account, you'll want to pay off your home loan debt as quickly as possible. However, there are times when you may need to access those extra funds. Some lenders will allow you to redraw any extra payments you've made if you need that cash.
Unfortunately, some home loans may charge you a redraw fee to access your own money. Others may place a limit on the minimum amount you're able to redraw at any time, such as restricting you to only redrawing a minimum of $1,000.
If you want to take advantage of this feature, check that there are no redraw fees and be sure you know whether a minimum redraw amount applies.
2. Offset account
The ability to link a 100% offset account to your mortgage can be the ideal way to reduce the amount of interest you pay on your mortgage. Every dollar you leave sitting in the account actively cuts down the amount of interest your bank can charge on your mortgage. The objective is to have your salary and any other household income paid into your offset account so that it reduces your interest. As you need those funds you simply access them the same way you would with any other transaction account. Ideally, you'll be spending less than you earn so you're building up your savings in that account, which reduces your interest and makes it easier for you to repay your mortgage faster.
3. Unlimited extra repayments
Some home loan types will actively restrict the number and amount of extra repayments you make off your loan. This frequently occurs with some fixed rate home loans, although it's not uncommon with some basic variable home loans. You may even find that paying a little more than the minimum amount due could attract penalty fees and charges with these loan accounts if you're not careful.
If you know you're likely to be paying more than the minimum payment and you want to ensure you're able to make extra payments on top of this whenever you have spare cash, check that you won't be penalised for doing so.
If you've already spent 5 years paying down your mortgage and you decide you want to sell your old home and buy a new one, think about exercising the portability option. This allows you to keep your existing mortgage and account numbers, but the bank switches the security property for the loan to show your new home instead of the old one. Coordinating the portability option can sometimes be a little tricky, as the settlement date of your new home purchase has to coincide with the settlement date of the sale for your old home. You also need to ensure the loan amount stays about the same or lower than your existing loan for this to work.
The portability feature can be ideal for saving money. If you decide to pay out your old loan and set up a new one for your new home purchase, you'll usually be up for a whole range of fees, such as discharge fees and establishment fees.
5. Salary crediting
Having your salary paid directly into your home loan account can be the ideal way to reduce the amount of interest you pay each month. This is the ideal feature to take advantage of, especially if you've chosen a home loan with a free redraw facility and no minimum redraw withdrawal limits. You leave your salary in the home loan as long as you can, but you redraw the amounts you need to pay for bills and living expenses when you need them.
Incentives and benefits
To attract new customers, lenders frequently offer one-time or limited-period incentives, benefits and rebates. These offers come in many forms—cashbacks, slashed rates or fees, or even non-financial incentives such as solar rebates. While these offers are appealing, they are only valid for one time or on a temporary basis.
Does it make financial sense to refinance?
When deciding to refinance, it’s important to compare the fees and charges against the incentives and benefits, as well as the overall performance of your mortgage during its lifetime. What can be great about incentives, however, is that they can be used to negate or balance any fees you might incur during a switch. Some examples of common incentives include:
- No or low monthly fees. Typically lasting for one year, the offer of no or low monthly account-keeping fees, annual fees or other ongoing charges for new borrowers is a common feature of home loans.
- Discounted rates. These could extend to big discounts for interest rates, also typically lasting for an introductory period of 1 year.
- Rebates. The most common rebate is usually a cash back offer.
- Packaged benefits. This can be handy if you have many loans spread out over lots of different lenders or if you are transferring your home loan to the provider you typically bank with. In this case, you may be able to just pay one annual fee for all of your loans.
If you're looking to refinance, weigh up your options and shop around for the best deal. Take into account the interest rate, features, fees, charges, benefits and incentives to find a refinance loan that suits your individual lifestyle and financial needs. Keep in mind that you need to carefully calculate any discharge or government fees you'll incur to exit your current mortgage as well as the upfront fees charged by your new lender.
The impact and cost of refinancing is more manageable since exit fees for variable loans were banned in 2011. However, break fees for fixed loans remain which is why it's important to balance any incentives earned by switching with applicable fees and charges.
Understanding how much you will be paying over 30 years is indicative of the loan you are applying for so read on to see what different cash back amounts can save you when refinancing.
|Estimated cost of refinancing||Incentive benefit||Difference|
|$1,325||$1250 cashback||Brings your total cost of refinancing to $75.|
|$1,325||$1000 cashback||Brings your total cost of refinancing to $325.|
|$1,325||$100 cashback||Brings your total cost of refinancing to $1,225.|
Review your life insurance policy
If you're looking to refinance your current mortgage, it may be worth reviewing your current life insurance policy. Most insurance consultants will recommend you review your life insurance at least once each year to ensure your cover still measures up to your financial obligations. It could be worth reviewing your policy with an insurance consultant to see if there is a more suitable option available.
Comparison of Home Loans
Rates last updated April 25th, 2017.
- Newcastle Permanent Building Society Premium Plus Package Home Loan - New Customer Offer ($150,000+ Owner Occupier, P&I)
Interest rate increases by 0.10%
April 10th, 2017
- Aussie Optimizer Variable Rate - LVR <= 80% (Owner Occupier + P&I)
Interest rate is now 3.86%
April 11th, 2017
- Newcastle Permanent Building Society Fixed Rate Home Loan - 3 Year Fixed (Owner Occupier Special Rate, P&I)
Interest rate is now 3.99%
April 24th, 2017
Staying with your current lender
The whole idea of refinancing your home loan is to ensure that you're getting the best deal available and the best value for your money. Keep mind that your existing should be your first port of call when you consider refinancing as you may be able to negotiate a better rate or fees.
No matter how competitive a deal may be, take a few moments to call your current bank. Tell them about the offer you've found and ask if they're willing to match it. You'll be surprised at how willing banks are to negotiate if they think you're going to refinance to a new lender.