I hate refinancing. This is because it usually means meeting with bank people and finance brokers.
I am lucky because I am an accountant. And that means I get to meet with myself if I want to refinance.
You? Well, you don’t get to be so lucky. You have to meet the bank people, the finance brokers and the accountant.
And I know that cannot be your idea of fun.
But you go through with it? Why? Well, you are sold the illusion of the promised land. You are told lower interest rates and reduced monthly payments are the holy grail of making money. It will allow you to go on holidays, renovate your home or give you some extra spending money.
But I have found it does not work that way.
That is because refinancing is not easy and usually expensive. A few years back, I renegotiated a loan within my SMSF. The interest rate was much lower, so you would have thought it was all singing, all dancing. But it wasn’t.
This is because it is critical you understand what a refinance means. Just because you pay less monthly does not necessarily mean you are better off.
Discharge fees
This is the golden goodbye gift.
This fee covers the administrative costs of closing your existing loan. Depending on your lender and loan type, it could be a few hundred or even thousands of dollars.
Sometimes, these fees are called exit fees.
Application fees
Your new lender wants to give you the money, but they have some fees too and what you to pay for it.
So, they charge an application fee to process your refinancing request.
This fee can vary considerably between lenders, so it makes sense to check each lender before you make a decision to change.
Valuation fees
Your loan will usually be secured on assets. Before banks lend, they want to know the value of those assets so they’ll commission a valuation. This fee can be a few hundred dollars or more, depending on the size and complexity of your property.
Government fees
Depending on your state or territory, you will need to pay registration fees and stamp duty.
Lenders’ mortgage insurance (LMI)
Banks take on risk, and for that risk, you pay them an interest rate. The higher the risk, the higher the interest rate. So, it is surprising that they still insist on LMI.
If you’re borrowing more than 80% of your property’s value, you’ll likely need LMI. This insurance protects the lender, but you pay for it.
Other fees
Remember potential legal fees, title search fees and other miscellaneous costs that could pop up during the refinancing process.
So, before you refinance, check whether it is worth it.
While the upfront costs might seem high, the potential long-term savings by paying a lower interest rate or shorter loan term can significantly outweigh these.
As stated above, when I refinanced, it was not all singing, all dancing. That was because the refinance costs ended up at $6,000 or 3% of the loan amount. This meant there was no savings for the first 8 months of the new loan.
But the above is not the only things you need to consider. Think about these things too:
Refinancing can be an administrative nightmare. The process involves paperwork and research, but it’s not rocket science. It usually needs the involvement of a few people too so think about the time it will take up. If you are time short this is going to be frustrating.
Refinancing does not always lead to savings. It’s important to carefully compare your current loan with potential new ones by factoring in all the costs involved. Sometimes, the savings might not be significant enough to justify the hassle and expense of refinancing.
Refinancing is step 5 of our 9 steps to working less, earning more and creating wealth. If you would like to know more contact Hitesh at hitesh@medisuccess.com.au or call 07 3172 0819.
