Cost of refinancing
Q. We bought our house in mid-April 2007 at $273,000 and are currently servicing a loan at 8.5%. We are looking to refinance our loan to another lender for the reason that there are now lower rates on offer between 7% and 7.5%. However, we’re not sure of the process and the costs involved. How do we know whether the cost outweighs the benefits of refinancing?
A. You're right about the costs potentially outweighing the benefits of refinancing. The competing lender’s lower interest rates may seem attractive at face value, but you really need to consider whether this alternative lender offers similar loan features to the ones you value most with your current loan. For example, the ability to make extra repayments with free redraws, branch or interest access and so on.
You also need to check whether there are any exit or break fees involved. Chances are there would be since you’re exiting your loan within four years. Most lenders impose a deferred establishment fee that could run into thousands of dollars if you pay off your mortgage within this period.
Make sure you assess the costs of moving including exit fees in your current loan contract and refinance stamp duty costs which vary from state to state, the likely changes in features and the estimated payback period it will take before you are really in front after a refinancing move.
A good rule of thumb is if the saving payback period is more than two years then it really may not be worthwhile refinancing. The simple alternative may be to approach your current lender to renegotiate the rate charged. Lenders are keen to retain good customers and you may be surprised at what they'll do to keep you.
Q. We have bought an apartment off the plan and it is due for settlement in March next year. We have been told that if we shop around for a mortgage then we should get a mortgage with no fees.
We were also advised that moving from one mortgage
to another after a few years would save us money and
the mortgage broker should pay the fees for the move.
Is this correct?
A. Getting a mortgage with no fees is obviously ideal – but the reality is most mortgages, even the ones with very low rates, will charge fees. Of all the possible fees you may be charged, it’s best to try and minimise monthly account keeping fees. A fee of $8 may look like small fry, but the average 25-year mortgage has 300 monthly repayments, so over time, this measly $8 fee will total $2,400.
You would be sensible to shop around for a mortgage. Compare interest rates, fees and loan features to find the loan which is the best value and suits your needs. A mortgage is a big financial commitment and it pays to make sure you get a good deal.
If you want to refinance after a few years to get a better deal, make sure that you add up all the costs involved. Exiting a loan could cost you several thousand dollars and getting a new loan involves upfront costs as well. You should only refinance your loan if you weigh everything up and decide that the benefits of refinancing significantly outweigh the costs.
Unfortunately, mortgage brokers don’t usually pay the fees if you decide to refinance. Sometimes the new lender might waive application fees, but there are other fees to watch out for, such as loan exit fees.
Lenders mortgage insurance
Q. I bought an investment property last year for $360,000 with a 10% deposit, and I paid around $5,500 lenders mortgage insurance. I've since heard that you can get a partial refund on LMI from your lender, if you pay out the mortgage within the first few years – is this true? I recently inherited $25,000 and I'm considering using this to pay down the loan.
A. It is possible in some circumstances to obtain a refund of the lenders mortgage insurance (LMI) premium.
In our experience, this is possible when the loan is completely paid out within the first year of the loan. It is the mortgage insurer, rather than the lender, who calculates and pays the refund. The refund will vary on a case-by-case basis, but typically it will be about 50% of the mortgage insurance premium.
So if you pay your loan out within the first year, you should ask your lender to arrange a refund from the mortgage insurer. It would be wise to put the refund into your new loan, which will result in substantial interest savings over time.
Even if you can't obtain a mortgage insurance refund, using the $25,000 to pay down the loan will save you money. Most loans calculate interest daily based on the balance of the loan. So, the $25,000 payment will save you interest.
Based on an interest rate of 9%, the monthly saving would be around $187, and the compound savings over the term of the loan would be many thousands of dollars. You should treat your home loan as a safe place to deposit funds and ‘earn’ the interest rate you are currently paying for your loan. But remember, you will need to check with your lender that you can redraw funds out of your loan if you need them and if there is a redraw fee.