Guide to Refinancing Your Home Loan
It may be worth refinancing your mortgage. Recent increases in interest rates, a change in personal circumstances or the introduction of new laws on unconscionable exit fees may mean refinance is right for you. Switching your home loan can offer significant benefits but there can also be some costs so you need to be fully aware of what is involved before proceeding.
How the process works
Refinancing a home loan involves moving from an existing to a new mortgage. The new mortgage will typically be with a different lender but it can be simply changing loans with the same lender.
Some of the top reasons for refinancing a home loan include:
1. Obtaining a lower rate or additional loan features;
2. Consolidating a number of loans into one,
3. Undertaking home renovations,
4. Adjusting the length of the loan to a longer or shorter term,
5. Switching from a variable rate to fixed rate or vice versa
Fees relating to refinance include:
• early repayment fees,
• existing mortgage title discharge fees,
• lender’s application and settlement fees,
• property valuation,
• new mortgage registration,
• stamp duty in some states.
It is important that customers weigh up the costs and benefits associated with refinancing. Over the long-term, switching home loans could save borrowers a substantial amount of money.
In this example a borrower has found a similar home loan at a cheaper rate. The calculation is based on a remaining loan size of $300,000 and term of 25 years. The new loan is 0.50% lower than the old loan however there are some costs involved in making the switch including exit fees that total $1,000 on the old loan and the new loan has an application fee of $600.
The borrower will save $98 per month on the lower rate loan which equates to an annual saving of $1,182. At this rate the borrower will be ahead taking into account the switching costs of $1,600 after 16 months. Over the remaining 25 years of the loan the borrower will save almost $28,000 in mortgage repayments.
In this example if the borrower continued to repay the old loan amount of $2,315 each month the new loan would be paid off 2 years and 9 months faster.