Taking the time out to review your home loan every couple of years is a very diligent step towards achieving your financial and lifestyle goals. As I mention here, refinancing can make a world of difference to your money journey, from improving cashflow and saving money, all the way through to growing wealth and accumulating an investment portfolio.
However, it is imperative that you understand the numbers and ensure the benefits of refinancing outweigh any costs.
Bonus Tip: Team up with a proficient and trustworthy mortgage broker who can do the number crunching for you!
1. Watch Out for Establishment Fees
When you refinance your existing home loan to a new lender, you may be up for establishment costs. These fees can be in the form of: application fee, valuation fee, settlement fee, etc. It is important to note that not all lenders charge these and oftentimes lenders will offer deals where they waive some or all of the establishment fees. Establishment fees are typically not too expensive, hence they are rarely a barrier to switching lenders.
2. Watch Out for Lenders Mortgage Insurance
If the value of your loan is higher than 80% of the value of your property, you will likely need to pay a lenders mortgage insurance premium. This can vary from a couple of thousand dollars to tens of thousand. You need to watch out here, as the lenders mortgage insurance fees can get expensive you really need to nail the numbers before refinancing. Remember, lenders mortgage insurance protects the lender, and not the borrower, in the case of a default.
3. Watch Out for Exit Fees
When you discharge an existing home loan from a lender, you may be up for an exit fee. Years ago, in a bid to encourage refinancing and increase competition amongst lenders, the government intervened and exit fees charged by lenders were substantially decreased. These days, exit fees are minimal and are rarely a barrier to refinancing.
4. Watch Out for Fixed Rate Break Costs
If you have a fixed rate, you may be up for some costs if you discharge your home loan before the fixed rate expires. Every bank calculates the fixed rate break costs differently, and each bank has quite a complex calculation to work it out. The cost can vary significantly and is generally affected by: fixed term remaining, interest rate locked in, interest rates today, etc. In my humble opinion, as part of the refinance due diligence process it is necessary to obtain a fixed rate break cost quote from your lender before crunching the numbers. Do not step this step, it is very important as fixed rate break costs can get expensive.
5. Watch Out for Government Fees
Each state or territory will have their own fees that they charge upon the discharge and registration of the mortgage, however they are quite minimal. Whilst it is important to understand these fees and factor them in when crunching the numbers, they are rarely an obstacle to completing a successful refinance.
Bonus Tip: Sometimes lenders run promotions where they will actually offer cash back deals to help clients cover the costs of refinancing their home loan. These deals come and go, and a highly skilled mortgage broker will have their finger on the pulse, ready to snap them up for clients!
Now you know what costs to look out for, are you ready to crunch the numbers and push forward in your pursuit of financial freedom?