It’s important that you understand, that while there are costs to refinance, they probably not nearly as much as you may think and are easy to work out before you go ahead.
In any comparison we do, we include these costs to give you a true savings figure. In most cases you should be saving a lot more than any one-off switching costs every single year of the new loan.
As I mentioned previously, Australian homeowners scored a win in 2011 when lenders were banned from charging exit fees on home loans, as part of the government trying to promote additional competition in the mortgage market.
If you are thinking of switching, you should make sure you get all the facts and compare like with like, so what you gain in the short term isn’t lost in the long run.
There are however, a couple of situations where it is still usually best to wait before refinancing.
If you have a fixed rate
If you have a fixed rate it can be expensive to refinance as you will incur ‘Break Fees’. Break fees on fixed rate loans are usually based on the interest rate you locked in compared to the current market interest rate, the length of time remaining on your fixed-rate term, and your original loan amount. They can run into thousands of dollars, and remain a formidable deterrent to fixed-rate customers thinking of refinancing.
In this case it is usually better to wait until the fixed rate expires and you have a variable rate again, at which time this fee no longer applies.
You can determine what the Break Fees will be by calling you lender and asking for a ‘Payout Figure’, then comparing this number to the amount you owe on your home loan. Make sure to confirm that the payout figure covers all the exit costs of the loan. If your payout figure is $278,000 but the amount owing on your loan is $272,000, then you know you have $6,000 in break fees and administrative costs to exit your loan.
Lenders mortgage insurance
The other thing to avoid is when you will get charged Lenders Mortgage Insurance when you are borrowing over 80% of the value of your home. Sometimes it is worth paying this fee because you will save more on a cheaper home loan, so it requires a case by case assessment.
Talking to your Mortgage Broker is one of the best ways to get a helicopter view of what it will cost you and what you stand to gain by refinancing.
Key Point: When refinancing, generally, you can expect to pay both a discharge and registration of mortgage fee of about $350 to $500 from your current lender, plus possibly an application fee of about $600 from your new lender.
Get the facts – One of the best ways to understand all of the pros and cons of a loan product is to ask the lender for a fact sheet. Many lenders don’t offer fact sheets upfront, but they are now required to provide one if you ask.
Key fact sheets provide information in a set format so it’s easier for you to compare loans. They also highlight important information, such as the total amount to be paid back over the life of the loan.