Consider the expenses involved in refinancing
If you’re debating whether to refinance your home loan, you need to think about whether the benefits of switching home loans will outweigh the costs involved.
There are a number of expenses to consider, including charges and fees from your current lender (and from your new lender if you’re switching banks). You’ll also need to consider what interest rates you’ll be paying over the long term.
The major costs of closing your home loan
Break costs
The bank may charge you a break cost if you exit a fixed home loan early. A break cost covers any potential losses your lender might incur because of you leaving your home loan early.
Discharge settlement fee
You might be charged a discharge settlement fee, otherwise known as a loan exit or termination fee, for closing your home loan.
Lenders may charge this fee to cover the cost of administration when you exit a loan. It can apply to both variable rate and fixed rate home loans.
Main upfront costs
Loan establishment fee
When you refinance, you may need to pay an application fee to cover the administration cost of setting up the new loan.
Property valuation fee
You may be required to get a property valuation in order to determine your equity. This cost can vary and some lenders may include the valuation in your application fee. Some lenders may cover the cost of the valuation themselves.
Settlement fee
If there are legal costs in settling a new home loan with the lender, you may need to pay a settlement fee.
Mortgage registration fee
Each time you refinance your home loan to a new lender, your new mortgage will need to be registered against your property title with your applicable State or Territory government, which will charge you a mortgage registration fee. The mortgage registration is usually requested by your new lender and the mortgage registration fee will vary depending on what State or Territory the property is located in.
Ongoing costs
Keep an eye out for ongoing costs like regular monthly fees or early repayment fees. This may be a critical factor to ensure that refinancing your home loan is worthwhile for you.
Other considerations
Switching your interest rate type
When you refinance, it’s a good opportunity to weigh up the pros and cons of fixed vs variable interest rates.
Introductory rates
It’s important to be aware that introductory interest rates on variable rate home loans will revert to the standard variable rate after the introductory period ends. Make sure you’re aware of what those rates are and what they mean for your repayments and interest charges over the life of the loan.
Lenders Mortgage Insurance
Lenders Mortgage Insurance (LMI) generally applies to home loans where the loan to value ratio (LVR) is more than 80 per cent.
If you paid Lenders Mortgage Insurance to your lender when applying for your existing loan, and your LVR is still higher than 80 per cent, you might need to pay LMI again when you refinance.
Consider keeping your current repayment amount
Refinancing to a lower interest rate can be a good opportunity to make the most of lower regular minimum repayments. But it also gives you the option to maintain the same repayment amount as your previous loan and reduce your debt faster.
Fixing your rate
Keep in mind that if you switch to a fixed interest rate home loan, there may be limits to what you can repay over the fixed interest rate term before you incur break costs – so make sure you factor that figure into any extra repayments you make.
Changes to your loan term
If you are considering extending your loan term when you refinance, your repayments may reduce, but the total amount you’ll end up paying to repay the loan will increase.
Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/home-property/pay-off-home-loan/cost-refinance-home-loan
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
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