Are you considering refinancing your existing home loan? Is your current loan on a fixed interest rate? You might be considering switching to a variable rate but you’re not sure if this is the right decision to make.
There are many reasons for home owners to consider refinancing. And generally, it’s quite prudent to investigate a refinance every 3-5 years or so, especially if there’s been a shift in the market.
In fact, if you took out your fixed rate loan quite a few years ago, you might find that you’re paying more than you actually have to.
What Are Some Valid Reasons To Refinance An Existing Home Loan?
Firstly, let’s look at some of the reasons why you might want to consider refinancing:
- You have a fixed rate home loan and realise that your interest rate is well above current market rates. Refinancing could conceivably save you tens of thousands of dollars on the overall cost of the loan.
Here’s an example of current variable rates for a home loan of $350,000 as supplied by Canstar:Source: https://www.canstar.com.au/compare/home-loans/
And to give you an idea of current fixed rate loans, here’s another example from Canstar Source: https://www.canstar.com.au/compare/home-loans/
So if your current fixed interest rate is much higher, you may be able to save substantially if you decide to refinance your existing loan.
- Another reason you might decided to refinance is to reduce the term of your loan from say 30 years to 25 years. This will certainly reduce the overall amount that you’ll pay over the term of your loan. Plus you’ll have the additional benefit of paying your loan off much faster.
- Maybe your current loans just doesn’t have the features that you’re now looking for. If you took out your loan quite a few years ago when your financial situation was a little different, you may not have been eligible for some of the features that are now available to you.
These could include redraw facilities for renovations, an offset account to help you manage your monthly finances better or the ability to access some of your home equity to purchase an investment property.
- Refinancing may also be an option if you want to consolidate some other debts into your home loan and pay lower interest rates. For example, you may have a car loan, an outstanding credit card debt and a personal loan for some recent home repairs.
If you have enough equity in your home, rolling all these loans into one can free up some of your cash as you’ll only need to make one loan repayment. Additionally, the interest rate you’ll be able to access with a new home loan would most likely be much lower than the one you’re paying on your other loans.
If your situation fits any of the above scenarios, then refinancing your existing loan could certainly be a viable option. However, you do need to weigh up the costs of refinancing before you make a decision to do so.
What Costs Are Involved In Refinancing An Existing Loan?
Whether you decide to refinance with your current lender or move to a new one, there are various costs which you’ll need to consider. These will vary but could include:
- A discharge fee to pay out your existing loan.
- An application fee for the new loan. This will of course, depend on who your new lender will be and can range from $0 right up to $1000.
- A valuation fee which will be charged by the new lender to obtain a current valuation of your home.
- Land registration fees to remove your current lender from the title of the property and add the new lender.
- Depending on how much equity you have in your home and how much you will be borrowing, you might also have to pay Lenders Mortgage Insurance.
- Your new lender may also charge ongoing administration fees which could cost up to $750 per annum.
- Because you currently have a fixed interest rate home loan, you’ll also be charged Break fees.
Just to clarify, on the 1st of July 2011 the Federal Government made a ruling which stated that banks and other lenders could not charge their customers if they wanted to repay their home loan earlier than the originally stated term of the contract.
However, if your loan was first established before the 1st of July 2011, you may still be charged an early repayment penalty. For loans advanced after this date, borrowers are charged what is called a break cost fee.
How Do Lenders Calculate The Fixed Rate Break Cost Fee?
The break cost fee is calculated by using the wholesale interest rates which were current during the term of the loan. The wholesale interest rates are determined for when the loan commenced and at the time that the loan will be repaid.
The difference between these two rates is then calculated. This interest rate amount is then multiplied by the loan amount and calculated over the remaining term of the original loan. However, you should note that each lender will have their own formula for working out the break cost fee.
Here’s how a typical formula might look:
Break Cost Fee = Home Loan Amount x Number Of Years Left In Fixed Term x Interest Percentage Change
On the plus side, you might find that if the interest rates have increased that you will not be charged a break cost fee. This is because the lenders will still make money if you pay out your loan before the fixed term has ended.
Here’s an example of how a break cost fee might be calculated:
Andrew and Melissa have a home loan of $450,000. They decided to enter into a fixed rate term over 5 years at a rate of 8%. Because interest rates had dropped significantly, they decided after 3 years, that they would repay their original fixed rate loan to get a better deal.
During the term of their loan the wholesale interest rates had decreased by 1% meaning Andrew and Melissa would have to pay a break cost fee. Here’s how that fee could be calculated:
Break Cost Fee = $450,000 x 2 years x 1% = $9,000 (approximately).
As you can see, there are various reasons for you to consider refinancing your existing home loan especially if you want to save some money and pay off your loan earlier. But before going ahead, you also need to weigh up the costs involved to ensure that you’ll come out ahead.
To begin with, why not discuss your situation with a mortgage broker who will be able to give you the available options and advise you of the costs involved. Then you’ll be able to make an informed decision and choose whether you want to go ahead with the refinancing or not.