Refinancing comes with many enticing benefits for property owners.
By refinancing you can promptly unlock thousands of dollars of equity from your property, and use that equity to diversify your investment portfolio, consolidate high-interest debts, or simply get a better interest rate on your mortgage.
But is it too good to be true? Are you even eligible to refinance and how much is it going to cost you?
Firstly, are you eligible to refinance?
Your eligibility for refinancing really comes down to the process the bank takes to assess your request for a loan.
There are three primary factors that lenders are taking into consideration:
- Security – what can they secure the loan against?
- Serviceability – what is your ability or propensity to pay back the debt?
- Character – what is your risk profile and credit history?
As well as your bank eligibility for refinancing, there are some things you should consider from a personal perspective.
For example, are you looking for a full documentation loan or a low documentation loan? Low doc loans are typically for people who are self-employed and unable to provide two years of company financials. Low doc loans come with a higher mortgage rate because they are riskier for the bank. In this scenario, refinancing may not make sense for you.
The other thing for you to consider is whether or not you are currently on a variable or fixed rate mortgage. If you currently have a fixed rate mortgage, there will be break costs to pay which can be significant, depending on the term remaining.
As you can see, your eligibility to refinance is largely contextual, and so are the costs you will incur. Let’s take a look at those now…
How much will refinancing cost?
There are a number of costs for you to include in your budget when deciding to refinance, here is a short-form list of the most prominent ones:
- Borrowing costs: This will be determined by your borrowing capacity and credit profile in the eyes of the lender.
- General fees: Loan application, exit, valuation, settlement, discharge and break costs. If you work with a good broker they can get some of these fees waived, but it really depends on the lender.
- Ongoing fees and comparison rate: Your comparison rate takes into account all of the ongoing fees and charges that are associated with a loan. For example, your headline interest rate may be 4% but your comparison rate is 5%. This rate is important to understand the costs you will incur on an ongoing basis with this loan.
- Government fees to register and transfer the property: Stamp duty, a tax imposed on asset acquisitions such as property, is the main fee to consider here and is roughly 5% of the purchase price.
- Lenders Mortgage Insurance (LMI): Lenders’ Mortgage Insurance (LMI) is a premium that is levied upon the loan applicant if they are unable to provide a 20% deposit.
Yes, there are a number of benefits to refinancing, but it’s also important for you to understand that there are costs you will incur. Working with a broker to put together a budget and cost analysis would be advisable to make sure you are making the right choice.