Refinancing can be a great way to save on your home loan, but how can you calculate just how much you’ll be able to save?
If you’re considering refinancing, you’re probably focusing on getting a lower interest rate. But you also have to account for a range of costs that come with refinancing.
We’ll break down these costs as well as how to figure out how much you can save.
There are a number of upfront fees that can come with refinancing, however, these fees and how much they cost differ between each lender. It’s important to take the cost of these fees into account when refinancing but also look at ongoing costs. Some lenders may have higher ongoing costs but little or no upfront costs. We have zero ongoing monthly or annual fees.
Mortgage application fee
If you’re refinancing with a new lender, some will require you to pay an application fee, also known as an establishment fee. This fee covers the administration and set up costs of the new loan and costs on average $1,000. We do not charge an application fee.
Property valuation fee
A lender will typically require a property to be valued prior to approving you for refinancing. The cost of this depends on the lender and the location of your property. Metropolitan areas are usually cheaper to value, given they are typically more accessible than rural areas. We charge a $220 valuation fee for metropolitan properties valued up to $1 million.
Discharge fees, also known as a termination fee, are paid to your existing lender to cover the administration costs of ending your loan with them. They can range from $100 to $1,000.
If you have a fixed rate home loan, you’ll be locked into an interest rate for a period of time, typically one to five years. It is possible to refinance these loans, but your lender will charge you break costs to cover the losses they’ll incur from your loan not running its agreed-upon term. Break costs vary vastly due to being dependent on the loan amount, the current variable market rate, and the length of time remaining on the loan. Often, they can rack up into the thousands of dollars, so speak to your existing lender to get an idea of just how much they might charge you.
A settlement fee is paid to your new lender to settle your new loan. It covers the cost of the lender arranging the loan settlement.
Lenders mortgage insurance
If you have less than 20% equity in your home you’ll be required to pay Lenders Mortgage Insurance (LMI). This cost covers the lender in the event you default on your loan, as you are considered a more risky borrower, due to your high Loan to Value Ratio (LVR). For a property with an estimated value of $600,000, a borrower with a 30-year loan term and 90% LVR would pay around $13,000 in LMI.
Lenders have been banned from charging early exit fees on loans taken out after 1 July 2011. If you took out your loan before this, your lender may charge you, so check with them before refinancing.
What are basis points?
When you’re trying to figure out whether refinancing might be worth it, you’ll more than likely looking to get a basis point reduction on your interest rate. But what are basis points?
Basis points (or bps) is a measure used to quantify changes in finance. One basis point is equal to 0.01%, so 100 basis points is 1%. So if by refinancing you got a 25 basis point reduction on your 3.00% p.a. rate, you’d now have an interest rate of 2.75% p.a.
Potential savings when you refinance
We’ve recently launched Australia’s first-ever variable rate home loan that starts with a 1. Our Smart Booster Home Loan is available for owner-occupiers for 1.99% p.a. for the first year, before reverting to 2.48% p.a. (2.47% p.a. comparison rate).
Using our refinancing calculator, let’s have a look at a couple of scenarios to see how much you could save by switching to this loan.
If you’re an owner-occupier who owes $450,000 on your current loan, with 25 years left on your loan at an interest rate of 3.00% p.a, you could save approximately $34k over the life of your loan.
If you’re an owner-occupier who owes $750,000 on your current loan, with 30 years left on your loan at an interest rate of 3.5% p.a, you could save approximately $140k over the life of your loan.
If you’re looking to refinance and want to start saving, apply now.