If you are a mortgage borrower and would like to save money, access additional loan features, and consolidate your existing loans, then refinancing might be an option for you.
However, before diving headfirst into the process, it is crucial for homeowners to understand the costs involved in refinancing their home loan.
How much does it cost to refinance a home loan?
Refinancing a home loan generally costs around 1% to 5% of your current home loan value. The exact amount, however, varies as it could depend on your lender and the fees they charge.
Some lenders may offer special promotions or incentives that could reduce or waive some of these costs. Additionally, some costs, such as application fees or valuation fees, may be negotiable.
You must also consider whether you are refinancing internally or externally, as one could be more costly than the other.
In internal refinancing, you refinance to a new home loan with your current lender.
Internal refinancing could involve lower fees as your current lender might offer incentives to keep your business — they may be willing to negotiate on some costs to retain you as a customer.
Moreover, the paperwork and processes might be streamlined since you are already a customer of the lender.
When you go the external refinancing route, you renegotiate your current home loan with a new lender.
If you are refinancing to a new lender, you will have to pay several fees, including application fees, valuation fees, and so on. Your old lender could potentially require you to pay a discharge fee.
Overall, internal refinancing might be cheaper in terms of upfront fees, but external refinancing could potentially lead to greater savings over the life of the loan if you secure a better interest rate or loan terms.
What fees do you need to pay when refinancing?
While the cost of refinancing a home loan varies, you can estimate how much you would need to pay by knowing the common costs associated with the process.
Fees charged by the new lender to process the application.
$200 - $1,000
Cost of property valuation to assess market value.
$300 - $500
Lenders Mortgage Insurance (LMI)
Insurance premium to protect the lender in case the borrower defaults on the loan
Varies, based on how much equity borrower has
Fees charged by the old lender to close the existing loan.
$150 - $350
Tax on mortgage transfer (may be exempt in some states).
Varies by state and loan amount
Regular account maintenance fees by the new lender.
$0 - $400 annually
Break Fees for fixed-rate loans
Penalty for breaking a fixed-rate loan early.
Varies based on loan amount and fixed term
Legal and Settlement Fees
Cost of legal services for refinancing.
$800 - $2,000
Insurance to protect against potential title defects.
$200 - $500
Please take note that the amounts above are only an estimate and must only be used as a reference. If you want a detailed breakdown of the costs you must pay when you refinance, you can ask your lender or your mortgage broker for a quote.
Why should you refinance your home loan?
Refinancing your home loan can be a good strategy if you want to make the most out of the current market conditions or if you want to make changes in your financial habits and goals. Here are some compelling reasons why you might consider refinancing your home loan:
Access more competitive interest rates
One of the primary reasons why you must consider refinancing is to get more competitive interest rates, especially in times of rate movements. You might be paying the so-called loyalty tax if you are staying with your current lender — it might be best to explore other options in the market and find a more competitive offer from another loan provider.
Reduce monthly payments
Aside from getting a lower rate, refinancing allows you to extend the loan term, spreading out the remaining balance over a longer period. This could result in lower monthly mortgage payments, providing you with a small buffer in your monthly budget.
If you have other high-interest debts, such as credit cards or personal loans, refinancing can allow you to consolidate these debts into your mortgage. This can simplify your finances and potentially save on interest costs.
Tap into your home equity
If your property has increased in value, refinancing can give you access to the equity in your home. You can use this equity for home improvements, investments, or other significant expenses.
Switch loan types
If you currently have a variable-rate loan and want more stability, you can refinance to a fixed-rate loan. Conversely, if you have a fixed-rate loan and expect interest rates to decrease, you may refinance to a variable-rate loan. You will have to take note, however, of the fees you might need to pay when doing these conversions.
Get better loan features
Refinancing can provide an opportunity to access additional loan features, such as an offset account, redraw facility, or flexible repayment options. These features can offer greater financial flexibility and help you manage your home loan more effectively.
Avoid paying the LMI
If you initially had to pay for LMI due to having a low deposit or equity in your home, refinancing at a lower LVR could enable you to eliminate or reduce this cost.
Change of circumstances
Your financial situation might have changed since you first obtained the mortgage. Refinancing allows you to adjust your loan to better suit your current circumstances and financial goals.
Renegotiate loan terms
Refinancing gives you an opportunity to renegotiate the terms of your loan, such as prepayment options or interest-only periods.
Frequently asked questions about refinancing costs
Refinancing can be a simple process but here are some commonly asked questions about it that can help you better understand its benefits:
When should I consider refinancing my home loan?
You might consider refinancing when interest rates have dropped, your credit score has improved, you want to access home equity, or when you wish to consolidate debts.
Is refinancing worth it?
Whether refinancing is worth it depends on individual circumstances, including potential interest savings, loan terms, break fees, and future plans. Conduct a cost-benefit analysis to make an informed decision.
How do I determine if I qualify for refinancing?
To qualify for refinancing, lenders typically assess factors like credit score, income, employment stability, loan-to-value ratio (LVR), and overall financial health.
Should I refinance with my current lender or switch to a new lender?
It's essential to compare offers from both your current lender and new lenders to find the best deal. Your current lender might offer incentives, but a new lender could provide more competitive rates and features.
Will refinancing affect my credit score?
Refinancing might result in a temporary dip in your credit score due to credit inquiries and the new loan account. However, managing the new loan responsibly can help improve your credit over time.
How long does the refinancing process take?
The refinancing process typically takes a few weeks. However, it can vary depending on the lender, the complexity of the loan, and your responsiveness in providing required documents.
Can I refinance if I have bad credit?
Refinancing with bad credit can be challenging, but it's not impossible. You might have limited options and may face higher interest rates. Working on improving your credit score before refinancing can increase your chances of approval.
Can I refinance if I have limited equity in my home?
Refinancing with limited equity might be possible, but you might face LMI costs or have fewer lenders willing to offer favourable terms.
Should I use a mortgage broker to help with refinancing?
Mortgage brokers can be helpful in finding loan options from multiple lenders and negotiating on your behalf. They can save you time and potentially help you secure better terms.
Are there penalties for refinancing?
The presence of penalties for refinancing depends on the terms and conditions of your current home loan. If you have a fixed-rate loan, you may face break fees for refinancing before the fixed term expires.
Do banks charge to refinance?
Yes, banks and lenders typically charge fees when you refinance your home loan. These fees may include application fees, valuation fees, and other administrative costs.
What is the discharge fee when refinancing?
The discharge fee is a fee charged by your current lender when you pay off your existing home loan to refinance with a new lender. It covers the administrative costs of finalising the loan.
Do you pay stamp duty when refinancing?
When you refinance to another lender, you may be subject to paying stamp duty. In case you decide to increase the loan during refinancing, you will be required to pay stamp duty only on the newly added portion of the loan, which is the difference between the original and increased amount.
The new lender may need the entire mortgage to be stamped for the full amount, but you can subsequently claim a refund from the Office of State Revenue for the portion related to the existing 'refinance' amount.
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