Switching your home loan can cost you hundreds, if not thousands in fees and costs. However, the overall savings earned from a lower-rate or lower-fee home loan, or a new mortgage with additional perks and features, could cover these costs tenfold over the life of your loan.
If you’re considering refinancing your home loan, but are nervous about the potential costs associated with switching, it’s important to keep in mind that there is more than one way that you could save money by switching.
Let’s explore how much money you could save with a mortgage refinance, how to calculate your break-even costs, and all the other potential benefits of switching home loans.
How much does a mortgage refinance cost?
The process of a mortgage refinance can cost you anywhere from a few hundred dollars, to several thousand, depending on the two lenders and your financial situation.
To discover how much you could save by refinancing, you’ll need to familiarise yourself with the common costs associated with switching mortgage lenders. These common switching costs may include:
- Discharge fees: A cost charged by your existing lender when you leave the home loan to pay to get a hold of your title deeds.
- Application fees: An upfront fee charged by your new lender when you submit your application for the new loan. Some lenders may be willing to waive this fee to gain your business, so it doesn’t hurt to ask.
- Break fees: If you choose to leave a fixed rate term early, this can cost you in break fees. Unfortunately, break fees can be significant as they are not a set dollar amount, but based on current market rates, the remaining loan term and remaining fixed term.
- Valuation fees: You may need to pay for the new lender to perform a valuation of the property as part of the application process.
- Lender’s Mortgage Insurance (LMI): A costly insurance that you could have to pay twice if you are refinancing with a loan-to-value ratio (LVR) above 80%. LMI can climb into the tens of thousands of dollars range, depending on the value of the property. Even if you applied for your original home loan with a 20% deposit as a first time homebuyer, if your property has decreased in value, this could have reduced your equity and your LVR may now be higher.
Not every lender will charge every fee and cost listed above. However, it is important to understand the potential costs so you can use them to determine just how much refinancing to a new lender could save you in loan repayments, as well as for your break-even calculations.
How much can you save by refinancing a home loan?
One of the most common reasons that Australian homeowners refinance is to switch to a lower interest rate. This can be a budget-saving option in a rising rate environment, as reducing your interest charges is a key way to lower your mortgage repayments. By switching to a lower-rate home loan, you could save tens of thousands in interest charges over the life of the loan.
For example, a homeowner wants to refinance their 30-year home loan five years into making repayments. The current loan balance is $500,000, and their current interest rate is 4.60%. The current monthly repayments are $2,808.
The homeowner decides to refinance to Reduce Home Loans Capitalizer Variable home loan at 4.19%. They will be giving themselves a rate cut of 41 basis points, and the new monthly repayments will be $2,692.
This is a potential savings of $116 per month, and $1,392 in just a year. That’s the equivalent of a weekend away with the family, or covering the cost of three energy bills.
Mortgage refinance savings: $500,000 home loan
|Repayments over 12 months
Note: Based on a hypothetical $500,000 home loan with 25-years remaining. Does not factor in fees or rate changes. Data accurate at 28/10/22.
How to calculate when you will break-even with your mortgage refinance
As mentioned above, a mortgage refinance is a process that will generally cost you some money in switching fees. However, if you’re switching to a lower-rate lender, you may be able to pay for these costs in the savings you could make from reducing your mortgage repayments. This is also known as your break-even calculation.
To do this you will need:
- The costs your current lender may charge you if you switch, such as a discharge fee.
- The costs your new home loan lender may charge you if you switch, such as an application fee or a valuation fee.
- Your new monthly repayments
To find the potential costs of refinancing, check the two home loans’ terms and conditions, or the Product Disclosure Statements for more information. Your new lender may advertise any switching costs on their website.
Using the above example, let’s say the refinancer’s current lender charged a $300 discharge fee. The refinancer was switching from a variable rate home loan, so they did not need to pay a break fee. Nor did they have to pay LMI, as their LVR was 70%. Their new lender agreed to waive the application fee, but did charge a valuation fee of $250. The total cost of the mortgage refinance was $550.
As the refinancer would be saving $116 each month in hypothetical mortgage repayments, this means that it would take roughly five months to break even from the cost of switching home loans ($550 divided into $116 becomes 4.7 months).
All the ways in which a mortgage refinance could save you big
Reducing your biggest monthly expense is just one of the benefits of refinancing, but there are actually a range of ways in which borrowers can save by switching home loans. This may include:
- Paying fewer fees – If your current home loan is charging you through the nose in ongoing fees, you could save a significant amount by refinancing to a lower-fee lender. Perhaps your current lender charges excessive annual fees, monthly fees, or fees for making additional repayments. There are many different lenders in Australia that do not charge these pesky fees.
- Adding helpful features – Not everyone is seeking value in the form of lower mortgage rates or fees. If you switch home loans to access helpful features, you could also save thousands in interest charges through an offset account, or save time by reducing your loan term, through making extra repayments.
- Nabbing a cash back deal – You could find yourself pocketing some much-needed cash through the refinancing process by considering a cash back home loan. Reduce Home Loans offers cash back deals up to $10,000, depending on the value of your property. This is money that can be put towards covering your switching costs, chipping away at your loan principal, or towards a new appliance or furniture for the home.
- Accessing equity – Some homeowners choose to refinance to access equity in their property, also known as a cash-out refinance. While this could extend the loan amount, borrowers typically access this equity to pay for big-ticket costs, such as a home renovation, which can increase your property’s value. If you were planning on selling the home, particularly if it is an investment property, refinancing to access equity for a renovation could help to bolster your potential profits.
Reduce Home Loans offers some of the most competitive home loans in the market to refinancers, so you can save time and money on your mortgage repayments. If you’re considering a mortgage refinance to nab a low rate, pay fewer fees, gain helpful features, grab a generous cash back deal, or access equity, you may want to speak to the experts.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.