05.Refinancing tips and traps
Discount brokers: one way to save on switching costs may be to use a discount mortgage broker. Some rebate some of the up-front commission lenders pay them. This could give you back around $1000 on a $300,000 loan.
Give your lender a last chance to keep your business. Tell them the new rate or lower fees you’re switching to and see if they can match it or do better.
Look for specials like zero application fees with new loans.
Switching to a cheaper lender might save money but traps can include:
Exit and ‘deferred establishment’ fees: (a set amount, equivalent to several months’ interest or a percentage of the original amount borrowed if you pay out the loan early). They’re increasingly applied to borrowers on an introductory rate.
Establishment fees for new loans can be up to $800.
Other costs: stamp duty, legal and property valuation costs can exceed $1000.
There’s no guarantee the new lender’s variable rate will stay the same or remain competitive.
‘Honeymoon’ or ‘teaser’ rates only apply for an introductory period; then repayments revert to the higher variable rate. Check all fees and loan ‘comparison’ or Annual Average Percentage Rates, which incorporate ongoing costs including fees and interest for various loan terms and amounts borrowed.
For more information, see Refinancing your home loan
Standard and basic variable loans
So-called basic variable loans can have traps. While they’re often 0.5% cheaper than the standard variable rate, disadvantages may include:
- Higher ongoing fees
Early repayment fees: for example, one low-rate basic loan has a 'deferred administration fee' of 1.2% of the original loan amount if the loan is paid out in full within the first 4 years.
Significant restrictions. For example, some loans only allow borrowers to repay monthly, so people looking to fast-track by making extra repayments need to upgrade to a higher-rate loan.
However, more recently, we’ve seen the introduction of basic loans that offer facilities that were traditionally only available with more expensive standard variable loans. These facilities include redraw and offset accounts.
Renegotiate with your lender
If your interest rate is as high as the major banks’ standard variable rates, you’re probably paying too much. Most banks will give discounts of up to 0.7% off standard variable rates, to customers with a large enough loan. If your lender isn’t prepared to give you a better offer, consider shopping around