Mortgage tips

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02.Mortgage switching costs

MoneySmart's mortgage switching calculator can help you work out the costs of changing your mortgage, how long it will take to pay off the cost of the switch, and the difference in payback times.

Watch out for fees that can offset any savings made by switching to a lower interest rate. These incude:
  • establishment fees
  • early termination fees
  • break fees
  • administrative costs
  • valuation fees
  • legal fees
  • Lenders Mortgage Insurance (LMI)
Mortgage lenders cannot charge early termination fees on new variable home loans taken out from 1 July 2011. However, variable rate home loans taken out before that date may still incur early termination fees.

Break fees on fixed rate loans can still be charged if you switch within the fixed-rate period, and with some lenders offering interest rates below five per cent, these loans can be very appealing. But if you’re likely to need to refinance soon, fixed interest rates could end up costing you more in break fees than what you’d save by moving to a lower interest rate.

If you break a loan with a fixed rate of 7.5%, but the interest rate your bank currently offers is six per cent, you may have to pay the 1.5% differential. Ask your lender for the amount for which you may be liable before switching.


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Lenders mortgage insurance

If you’re borrowing more than 80% of your property’s value, it’s likely that you’ll have to purchase lenders mortgage insurance (LMI ). LMI protects the lender from loss should you default on your loan and the amount from the sale of your property is less than the outstanding loan amount. The insurer will still try to recover any outstanding money from you if you default on your loan. 

LMI isn’t portable between mortgage lenders, and it’s not guaranteed that you’ll receive a rebate on your premium if you terminate your mortgage.

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