Don’t rush to refinance. Take five minutes to do the maths first
Refinancing seems to crop up in much of the home loan news we read and there's good reason.
New variable rate loans entered into after 1 July 2011 are banned from charging exit fees and the market is full of all kinds of different deals, from bonus Qantas Points, to cheaper interest rates and everything in between.
Refinancing isn't the best option for all borrowers. Fixed rate borrowers still have a range of costs they need to pay to break free from their contracts and variable rate borrowers need to consider how much it'll cost them to do this.
Rather than use a spreadsheet or scrap of paper, use the refinancing cost calculator for your home loan below to see the total upfront cost of refinancing. Once you enter the figures in the calculator will tell you whether your costs will outweigh your savings.
How do I use this calculator?
The refinancing calculator is made up of boxes arranged into two columns. Each box corresponds to a different fee you may be charged for leaving your existing loan or taking out a new one. Simply enter in these fees and you'll get a total cost for refinancing. Here's a bit more about what each of these fees are.
Application fee. Most new loans have an application fee or establishment fee. This fee may include the legal costs of a loan within it. This fee covers the cost of setting up your loan.
Legal fee. Most loans charge a legal fee which covers the cost of having a solicitor or conveyancer process your loan and property purchase details.
Valuation fee. When you refinance your new lender will want to know the value of your property, so will request a valuation.
Service fee. Some loans - particularly package loans, charge borrowers a monthly or yearly fee in exchange for the discounts on interest rates and other products.
Settlement fee. This fee is charged by your new lender and covers the cost of transferring funds to your account or to pay off your existing lender.
Exit fee. Fixed rate loans and loans entered into before 1 July 2011 may charge you an exit fee, or in the case of a fixed rate loan, break costs, when switching. This is supposedly to ensure your bank doesn't lose out if you change loans.
Early termination fee. This fee is charged if you pay out your loan before the end of the loan term, it typically is only charged for fixed rate loans however some variable loans may also charge it.
Lender's Mortgage Insurance. If you refinance to a loan where your Loan to Value Ratio (LVR) is more than 80% you'll have to pay this premium.
Discharge fee. This fee is charged by your existing lender to let you out of your current mortgage.
Registration fee. This is a state government charge which may be charged when refinancing to register your property so that all claims on it can be checked by future buyers.
Stamp duty. You may be charged stamp duty on your mortgage by the government even when refinancing.
Rate lock fee. The interest rate offered on a new loan can change each month in line with the Reserve Bank of Australia's cash rate target. This means the rate you see when you apply might be better than the rate you get once the loan application process is finished and your loan is approved. A rate lock fee is charged to lock in the rate you see when you start the application process to avoid this happening.
Possibly the easiest way to check these fees is to get two quotes when thinking of refinancing: one from your existing lender and another from the lender you'd like to switch to.
Once you have a breakdown of these fees enter them into the spaces in the calculator above and get the total.
How do I calculate the savings?
You'll notice there's a space underneath the first section of this calculator where you can enter the total cost of refinancing and the savings you expect to make. Once you've done this the calculator will tell you whether or not it's worth refinancing.
Filling the savings box may be harder than you think and will depend on your situation. Say your existing loan of $400,000 has a rate of 5.70% p.a. and your new loan has a rate which is only 4.70% p.a.
Switching to this loan would save you approximately $70,000 in total payments over the 25-year term. In reality, interest rates fluctuate over the course of a loan so this wouldn't be exact, but gives you an idea of how much you could stand to save.
Another way of finding out how much you could save is if the new loan you're applying for has a new feature which saves money, such as an offset account. If this happens you could work out the savings the feature would give you with our mortgage offset calculator.
If you switched to a new home loan of $400,000 which offered an offset account and kept it at $10,000 it would save you $16,376 in interest and cut one year from your loan term. This is a net saving of $6,376, and is based on an interest rate of 5.70% p.a.
How would you keep your offset account with $10,000 in it throughout the full 25-year loan term? There are a number of ways. You could move a bit of your savings or your emergency fund into the account and then have you and your partner's salaries deposited into the account.
Leave the salaries in the account as long as you can and use a credit card for any purchases or bill payments in the meantime, and then pay off the credit card balances before interest is charged on them.
Your new loan may have lower fees for the use of features, or if you're switching from a package loan to a new package loan the monthly or yearly fee may be lower.
Take these into account, and any other savings you might get from switching and type them into the savings box.
To refinance or not to refinance?
Once you've entered in both the savings made by refinancing and the costs the calculator will show you whether or not it'll be worth it.
If you've entered in the immediate savings you'll make by switching, things such as lower fees— the costs may outweigh the savings. In this case a good rule of thumb is that if the costs are high enough to take more than two years to see savings come through it's also not worth refinancing.
Refinancing can be a great way to save money on your home loan, but remember establishing a loan is also expensive, so it's not always the best move to make. With this being said, you should regularly review your home loans, credit cards and savings accounts each year to ensure you're not missing out on a better deal.