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An analysis from a financial comparison site has revealed the average cost for Australians to refinance an owner-occupied home loan.
Canstar’s analysis found that the average cost to refinance an owner-occupied home loan in Australia sits at $803, including fees such as discharge, application, valuation, documentation, legal, and settlement costs.
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According to Canstar, for borrowers to recover the average cost of refinancing within the first 12 months of switching over to a lower rate on a $500,000 loan, they would need to secure a rate discount of 0.21 per cent if their existing average variable rate is 6.98 per cent.
On a rate of 6.77 per cent, repayments would be cut by $67 per month or a total of $804 in the first year, covering the cost of refinancing.
Furthermore, refinancers could have spent more than $348 million in refinancing fees in one year as more than 433,453 loans were refinanced to a new lender in the 12 months to April according to the Australian Bureau of Statistics (ABS).
Canstar’s editor-at-large Effie Zahos said getting a rate discount is crucial to cutting repayments costs and recouping refinancing fees.
“Borrowers have to get enough of a rate discount to make sense of switching. Refinancing doesn’t come for free. There are costs associated with switching lenders that you need to recoup,” Ms Zahos said.
“If you don’t secure a discount of at least 0.21 percentage points, it’s not worth the hassle and paperwork. The aim of course is to try and always secure the lowest possible rate.
“In a rising interest rate market, there’s no guarantee that the lender you move to will always maintain that interest rate discount.
“Once you secure a lower rate and make the switch, be careful not to extend your loan back to the full 30-year term when refinancing. While this will lower repayments even further, it takes longer to repay the loan and will see you pay more interest in the long run.”
Speaking to The Adviser, director of Kelso Finance, Sandy Kelso, said there are lots of hidden costs when refinancing that is why it’s good to find a broker who “knows the lay of the land”.
“I will break down the savings to clients to show if it is or isn’t worth the move and paperwork involved,” Ms Kelso added.
“It does make sense to contact your broker if your loan is rolling off fixed to see what your current bank is offering before you make the move.
“Looking at the rest of the market, you will get a clear sense of whether you have a good deal or not.”
Major bank tweaks serviceability buffer
The Commonwealth Bank of Australia (CBA) became the second major bank (after Westpac) to announce that it is bringing in a reduced serviceability buffer of 1 per cent for select customers refinancing their loan with CBA.
An alternate interest rate serviceability buffer now applies to eligible refinancing applications as of 23 June.
Instead of needing to pass a buffer that is 3 percentage points higher than the product rate (as per the prudential regulator’s expectations), eligible applications received from this date will be able to pass servicing on the higher of alternative buffer rate of 1 per cent or the floor rate of 5.4 per cent.
[RELATED: CBA to offer reduced serviceability buffer]
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