Refinancing and the costs involved.
Refinancing your home loan can be a valuable strategy for managing rising interest rates and mortgage repayments. In this article, we will explore the process and associated costs to assist you in determining whether refinancing is the right choice for you.
There are two types of loan refinancing:
Internal refinance: This type of refinance occurs when you stay with your current bank or lender but switch to a different home loan product.
External refinance: An external refinance involves moving your loan to a different bank or lender.
An internal refinance typically does not incur any additional costs. However, you are limited to the interest rates and loan products offered by your existing lender. Whether they are willing to provide you with these options will also factor in. On the other hand, an external refinance can provide you with a wider range of choices, but it usually comes with various additional fees. These fees may need to be paid to both your current and new lender.
It is crucial to be aware of these costs in order to make an informed decision before proceeding with refinancing your mortgage.
What are the refinancing costs?
While using our Online Refinance Calculator can help you determine the difference in repayments between two loans, it's important to note that the overall cost of refinancing will vary based on your individual circumstances. There can be additional fees and charges you need to pay depending on several factors, such as the type of loan you have, the lender your currently with, the lender you intend on changing to, and in which state or territory you live.
Here is a list of common fees that are typically associated with refinancing and should be taken into consideration when calculating the total cost:
Discharge Fee: This fee is paid to your current lender to prepare the necessary documentation and fully repay the existing loan amount.
Application Fee: Charged when submitting a new loan application with your new lender. Quite often they will waive this fee.
Valuation Fee: Covers the cost of an updated property valuation, which serves as security for your mortgage. Another fee your new lender will quite often waive.
Land Registration Fee: Covers the removal of your existing mortgage registration with your current lender and the registration of a new mortgage with your new lender.
Lenders Mortgage Insurance (LMI): May be required if your property equity is less than 20% of the deposit. If you paid an LMI premium on your current loan and don't meet the 20% deposit requirement for the new loan, you will need to pay it again.
Ongoing Fees: These fees may be associated with the new loan product you choose, such as an annual fee or monthly charge. You may already be paying similar fees on your current loan.
Break Fee (If you’re on a fixed rate loan): Incurred as compensation to your current lender if you refinance before the end of your fixed term. Break costs can vary significantly, as each lender has different formulas and calculations to determine the amount.
While refinancing can be done with relatively low costs, it can also become expensive. Depending on the applicable fees in your specific situation, the estimated refinancing fees could range from $300 up to $2500 or more. It's crucial to factor in these additional costs before making any decisions.
It is recommended to carefully consider these costs and compare them with the potential savings or benefits of refinancing before proceeding.
Is refinancing worth it?
As discussed above, there will likely be an associated cost to refinancing your mortgage. You need to carefully consider these and compare them with the potential savings or benefits of refinancing before proceeding. Obviously the sooner you can recoup these costs the better and the greater your long term savings.
A 0.25% interest rate reduction may seem insignificant and not worth the hassle of refinancing. However, even a small reduction like this can make a significant difference over an extended period. For instance, on a $400,000 loan in today's market conditions, a 0.25% interest rate reduction could save you $60 on your monthly repayments and over $18,000 in interest over a 25-year loan term (see table below).
| Interest Rate | Monthly Repayment | Total Interest over 25 years |
Existing Loan | 6.0% | $2,577 | $375,148 |
New Loan | 5.75% | $2,516 | $356,832 |
Difference | 0.25% | $61 | $18,316 |
That is a significant saving to consider when thinking about long-term benefits. However, it's also important to assess whether the costs of refinancing are suitable for your current situation in the short term. For instance, if the refinancing costs amount to $800, it will take you over a year to recover this amount through your savings. It is essential to consider this impact within the context of your current financial position, future interest rates, and your overall financial plans.
It is worth mentioning that certain lenders offer cashback and other incentives to encourage refinancing. These incentives can help recover some or all of the refinancing expenses. However, it is important to avoid letting short-term perks excessively influence decisions regarding a long-term commitment like a home loan. Supplementary benefits, such as cashback payments, should be viewed as additional bonuses rather than the primary factors determining your loan selection.
By considering the long-term savings, evaluating the short-term costs, and remaining cautious about the influence of immediate perks, you can make a well-informed decision regarding your home loan refinancing.
What is the process of refinancing?
So, you have made the decision to refinance your mortgage. How do you go about it?
The process may vary slightly depending on the lender and your individual circumstances but is generally similar to how you applied for your existing loan. Here are the typical steps involved:
Review your current mortgage: Take stock of your current interest rate, remaining loan balance, repayment terms, and any associated fees or features.
Research and compare lenders: Explore different lenders and compare their loan products to find options that better suit your needs. Consider factors such as interest rates, loan terms, fees, repayment options, and customer service levels offered by the new lender.
Assess your financials: Evaluate the identified options against your short and long-term financial goals. Crunch the numbers to determine if refinancing your mortgage will actually place you in a better position.
Submit a loan application: Once you have selected a lender and loan product, complete a loan application providing all the necessary information. The lender will assess your application and may request additional documentation, such as proof of income, employment verification, and credit history.
Property valuation: The lender may require a new valuation of your property to determine its current market value.
Loan approval and offer: If your application is approved, carefully review the loan offer, including interest rates, repayment terms, fees, and any special features.
Accept the loan offer: If you are satisfied with the loan offer, sign and return the documents to the lender and fulfil any final requirements, such as providing a Certificate of Currency showing your new lender as an interested party.
Discharge and settlement: This involves transferring funds from the new loan to pay off your old loan and registering the new mortgage.
Repay your new loan: Once the refinancing process is complete, begin making repayments on the new loan according to the agreed-upon terms.
Where should I start?
We understand that it can feel overwhelming to determine whether you should refinance and then navigate the process to make it happen. It's a life admin task that many people don't enjoy. However, with proper consideration, refinancing has the potential to save you thousands of dollars.
If you're facing challenges in getting started, feel free to contact us at I Know The Broker and leverage our expertise. We will guide you through the process, handle the research and application legwork on your behalf, and ensure that you benefit from the best available options. We are always here to help!
