Refinancing your loan? What fees to expect

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When thinking about refinancing your home loan, you should always think about the costs and fees that come with your decision. The last thing you want is to be spending money you haven't budgeted for. To remove the element of surprise, this guide gives a run-down of the most common fees you can expect to pay.

The many benefits of refinancing a home loan include lower repayments and increased flexibility. However, it is essential you understand the financial commitments involved before taking the plunge, which is why borrowers should always ask for a breakdown of costs from both their old and new lenders, before going ahead with the refinance.

Here's a summary of some of the fees you might face. Note that some lenders may not charge all of these fees. Although it’ is wise to choose a loan that charges low fees to save you thousands of dollars upfront, you should consider and weigh up these upfront or ongoing fees and the new interest rate, in order to decide whether refinancing will benefit you in the long run.

Loan application fee
The loan application fee is simply a one-off payment for the set-up of a new home loan (or refinancing). You would have paid this when establishing your existing home loan. It’s also known as an ‘establishment’, ‘set-up’ or ‘start-up’ fee.

Valuation fee
As part of the refinancing process, a lender will value your property, just as your existing lender would have done for your original home loan application. The fee covers the cost of this service, which uses a valuation professional. Sometimes, the valuation fee can be incorporated into the loan application fee.

Title protection fee
Title protection fee protects a buyer or home owner from risks such as those associated with fraud, planning defects, unapproved alterations to a property inherited from a previous owner, errors on the part of councils, and plenty more. Title protection fee may provide peace of mind to customers when refinancing.

Settlement fee
Settlement fees are costs incurred to ‘settle’ your new loan. It covers things like accounting and legal fees, and other similar administrative expenses. It may also include valuation fees - see above.

Discharge fees on existing loan
This is different from the settlement fee, your previous lender may charge you discharge or exit fees once they have agreed to end your previous home loan agreement. Home loan exit fees were abolished for loans entered into after 1 July 2011 for variable rate loans; however lenders may charge a discharge fee to reimburse them for reasonable administrative costs arising from closing out your existing loan. The discharge fee would have been stipulated in the conditions of the loan contract. It’s also useful to remember that discharge fees vary between loan types. Lenders may also charge what is called a ‘break fee’ for ending a fixed rate loan early. This is covered further below.

Fixed loan break fees
When a lender agrees to lend money to you for a fixed period at a fixed rate, the lender may enter into finance arrangements to enable it to do so, which may consist of the lender borrowing money on similar terms. If the fixed rate loan is repaid before the end of the fixed rate period, the lender may still be obliged to pay the agreed rate for the balance of the period to its own lender, or it may incur other costs associated to its finance arrangements. This causes a loss to your lender, which may be passed on to you as a break fee.

If the fixed rate loan or any part of it is terminated early, break fees could be substantial. This is particularly true if market interest rates have reduced during your fixed rate period. Ask your lender for an estimate of break costs before you arrange to repay a fixed rate loan early.

Government fees
When refinancing you’ll be subject to State or Territory government fees. These are twofold: to complete the discharge with your previous home loan and to register your new one. When refinancing, you may be entitled to reimbursement of some government fees from the relevant government body.

Monthly administration fees on the new loan
Home loan providers may charge a monthly administration fee for your refinanced loan. The amount of this fee, or whether this fee is charged at all, may depend on the type of loan. Some lenders may instead charge an annual fee or a package fee.

Lender's mortgage insurance
At the point of refinancing, you may be charged a Lender's Mortgage Insurance (LMI). The premium may be one off or may be capitalised into the loan; this means it gets added in to the monthly amount and it protects against the risk of mortgage default. Generally speaking, the higher your equity in the property, the lower this fee will be. Depending on your risk profile and product type, this fee may be charged regardless of your deposit amount.

When it comes to refinancing, there are many options available to you.Talk to your mortgage broker, accountant or a financial adviser before making any refinancing plans.

To find out more about Pepper’s refinancing options, please call one of our Lending Specialists on 13 73 77. They are there to help.

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