There are a number of costs that may be involved in your refinancing journey. What costs may apply will depend on your lender, your personal circumstances and what you are looking for in your new home loan.
Refinancing can be a great way to secure a lower interest rate and save money. It can also help you adapt to new financial circumstances, consolidate debt, switch between a variable and fixed interest rate, add on loan features or access your home equity.
Those with fixed rate home loans may be subject to break fees should they refinance before their fixed period is over. A home loan with a fixed interest rate can offer a great deal of stability, given that you know exactly how much your repayments will cost. However, these loans don’t offer much flexibility and it’s easy to feel tempted by lower interest rates elsewhere.
By refinancing from a fixed rate to a variable rate, you will likely benefit from a lower interest rate and improved flexibility — such as the ability to make unlimited extra repayments. When refinancing to a variable interest rate, you may choose to utilise certain loan features.
When considering whether to break your fixed rate loan by refinancing, work out whether the benefits will outweigh any fees attached. Check with your existing lender to find out whether you will need to pay break costs. Sometimes, if you refinance and stay with your current lender, you may avoid many of the usual refinancing fees.
An offset account is a kind of savings account attached to your home loan balance. Any money in this account offsets the interest you have to pay. For example, if you have a loan balance of $200,000, with $20,000 in an offset account, you only pay interest on $180,000.
You can use your offset funds however you like, as you have easy access to them and don’t have to pay withdrawal fees. You may need to pay an annual or monthly fee that will add up to a couple hundred dollars per year.
A redraw facility is very similar to an offset account. It effectively pools any extra repayments you make on your home loan into an account that you can access. Like an offset account, the funds in your redraw facility offset your interest costs. While you can access your redraw facility funds, you may be subject to withdrawal fees and wait times.
Exit fees may apply to loans entered into before 1 July 2011. What this means is that if your loan is discharged prior to a particular date, as outlined in your loan contract, you may be subject to fees.
Speak to your lender about what fees might apply should you refinance your home loan.
Most lenders will charge an application fee that covers the cost of documentation and the establishment of the new home loan. While many lenders choose to waive this fee during promotional periods, or for certain loans, it can cost upwards of $200.
If you’d like to avoid application and establishment fees, Lendi may be able to help you find a home loan that works for you.
Annual or monthly fees are charged on some home loans as a form of ‘loan maintenance’. Annual fees usually cost between $200 and $400. While this may not seem like a lot, it adds up over time. Paying $300 every year over the course of your 30 year loan term will cost you a total of $9000.
Many lenders offer home loans with no monthly or annual fees. You can ask your lender or broker about these options and whether the loan package will work for you.
A crucial part of the refinancing process is the property valuation. A property valuation helps to calculate how much equity you have in your home. Valuations help lenders understand your borrowing capacity and ensure they don’t lend you more than the property’s value.
Property valuation fees are determined by your property’s value. They typically cost between $200 and $600. Many lenders will value your property for free, so this may be a fee you can avoid.
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When refinancing, lenders analyse your loan to value ratio (LVR). LVR indicates how much of the property’s value you intend to borrow. If you have less than 20% equity in your home, you may still be able to secure the new loan, but you are likely to face Lenders Mortgage Insurance (LMI) fees.
Some lenders may not charge LMI when you have less than 20% equity, but this could come with a less competitive interest rate and annual fees.
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You may also encounter mortgage registration fees and legal fees. Mortgage registration fees are paid once per home loan and vary between states, but range from about $130 to $190. If you receive legal help from a solicitor or conveyancer when refinancing, you will likely incur costs.
Before you refinance, it’s smart to have a thorough understanding of what fees may be involved. If the refinancing fees outweigh potential savings, it may be best to reconsider or get in touch with an expert. Lendi’s Home Loan Specialists are here to help you find a home loan that suits your needs and saves you money.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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