As switching to a cheaper loan could lead to huge potential savings, it’s not surprising that more and more property investors and homeowners are refinancing.
But unless you do your homework, you could find yourself grappling with nasty surprises, including higher fees, tougher terms and new deposit requirements.
According to a representative from Mortgage Choice, a home buyer with a $1 million mortgage paying 5% could save $683 a month (or more than $204,000 over 25 years) by switching to a 3.78 per rate, with the switching cost recoverable in two months.
Such huge savings help explain why remortgaging has increased three-fold during the past 25 years to represent 30% of current loan approvals.
John Flavell, chief executive officer of Mortgage Choice, encourages property buyers to shop around for the best rates and terms.
“Property investors and owner occupiers paying more than 4.5 per cent interest on their mortgage could be paying too much,” he said.
However, Christopher Foster-Ramsay, principal at Foster Ramsay Finance, warned property investors to not always go for the cheapest rates.
“Cheapest is not always the best. It is important that consumers read the fine print to pick up any hidden fees and charges that may cost benefits or savings. The devil is in the detail.”
Go through this checklist of fees
When you’re refinancing, always pay attention to the timing.
Settlement occurs when the contract is signed for the new loan and the funds are drawn.
This involves paying off the existing loan using funds from the new loan.
Stuart Wemyss, owner and director of ProSolution Private Clients, suggests going through the following checklist of fees to help you figure out whether the switch is worthwhile:
- Discharge fees from an existing lender – This is an administrative fee ranging from $100 to $200 for processing the discharge of the mortgage or loan.
- Early repayment fee – While most have been phased out, some of the smaller lenders can impose a fee ranging from $100 to $1000.
- Fixed rate break fee – These fees can total up to several thousand dollars.
- Mortgage registration – This state government fee is levied when the incumbent lender deregisters a mortgage and the new lender registers the new one. The cost will depend on your state, but ranges from $220 to $350.
- Application fees – Can cost nothing but could be as exorbitant as $1000.
- Valuation fees – They’re not normally charged for standard properties but can cost from $100 to $300.
- Settlement fee – This administrative fee is charged by the new lender and costs between $100 to $300.
- Lenders mortgage insurance – LMI applies if more than 80% of a property’s value is borrowed. If can range from 2% to 4% of the loan amount, which often makes it too expensive to refinance.
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