| refinance, mortgage rates, mortgage | 10 Feb 2008 11:00 PM |
| Refinance by Mark Bonaventura | |
To refinance or not to refinance – that is the question. In the current upward interest rate cycle it is natural that home loan borrowers may seek relief from the cash flow pressures caused by increased mortgage repayments. Whether or not relief can be obtained by refinancing their loan with a different lender needs to be carefully analysed and evaluated as any benefits gained can be swiftly eroded by the associated costs.
So what factors do we need to consider to determine the cost-effectiveness of a refinance? Firstly, there may be costs associated with discharging the existing mortgage. Is there a cost for early payout? This could take the form of an interest rate penalty eg one month’s interest, a deferred establishment fee, a discharge administration fee or, in many cases, a combination of these. Will the outgoing lender be using a solicitor to prepare the discharge of mortgage?
If this is the case the legal costs are generally borne by the borrower. Further consideration should be given to potential break costs if one is to refinance a fixed rate loan. And borrowers who think they can outsmart lenders by refinancing from one honeymoon rate to another should be aware that these types of loans usually include penalties to enable the lender to recoup the difference between standard rates and discounted honeymoon rates in the event of early termination.
Potentially the total cost of refinancing a loan can add some thousands of dollars to the actual loan balance and it is therefore prudent to seek an indicative payout figure from the current lender as a first step.
Secondly, borrowers need to consider the cost of establishing the new loan. What fees are payable? Is there an application fee or establishment fee? Are there separate valuation fees and legal fees? How much will the associated disbursements and government charges cost? Do they qualify for an exemption of stamp duty for the refinanced loan? Will they use their own solicitor? It is possible to accurately assess these costs in advance if borrowers do their homework.
Thirdly, are there ongoing fees and charges associated with the new loan? How do they impact on the true rate? Under comparison rate legislation lenders are obliged to include all known fees when calculating and advertising the comparison rate. However there are some loopholes. If a fee or cost is deemed to be “unascertainable” it need not be included in the comparison rate calculation. Also government charges are not considered in the calculation.
And finally, is the borrower certain that the differential in interest rates between the outgoing lender and the new lender will be sustained in the future? It is not uncommon for some lenders to resist passing on increases in interest rates for as long as possible to gain market share, only to pass it on at a later date thereby eroding any gains the refinancing borrower anticipated.
In summary, by itemising all costs associated with a refinance, borrowers can evaluate the break even point of recouping same. They can then decide whether or not the refinance exercise is worthwhile in monetary terms. Borrowers may find that the resultant small gain is not worth the hassle of pursuing given the time needed and paperwork required.
So what factors do we need to consider to determine the cost-effectiveness of a refinance? Firstly, there may be costs associated with discharging the existing mortgage. Is there a cost for early payout? This could take the form of an interest rate penalty eg one month’s interest, a deferred establishment fee, a discharge administration fee or, in many cases, a combination of these. Will the outgoing lender be using a solicitor to prepare the discharge of mortgage?
If this is the case the legal costs are generally borne by the borrower. Further consideration should be given to potential break costs if one is to refinance a fixed rate loan. And borrowers who think they can outsmart lenders by refinancing from one honeymoon rate to another should be aware that these types of loans usually include penalties to enable the lender to recoup the difference between standard rates and discounted honeymoon rates in the event of early termination.
Potentially the total cost of refinancing a loan can add some thousands of dollars to the actual loan balance and it is therefore prudent to seek an indicative payout figure from the current lender as a first step.
Secondly, borrowers need to consider the cost of establishing the new loan. What fees are payable? Is there an application fee or establishment fee? Are there separate valuation fees and legal fees? How much will the associated disbursements and government charges cost? Do they qualify for an exemption of stamp duty for the refinanced loan? Will they use their own solicitor? It is possible to accurately assess these costs in advance if borrowers do their homework.
Thirdly, are there ongoing fees and charges associated with the new loan? How do they impact on the true rate? Under comparison rate legislation lenders are obliged to include all known fees when calculating and advertising the comparison rate. However there are some loopholes. If a fee or cost is deemed to be “unascertainable” it need not be included in the comparison rate calculation. Also government charges are not considered in the calculation.
And finally, is the borrower certain that the differential in interest rates between the outgoing lender and the new lender will be sustained in the future? It is not uncommon for some lenders to resist passing on increases in interest rates for as long as possible to gain market share, only to pass it on at a later date thereby eroding any gains the refinancing borrower anticipated.
In summary, by itemising all costs associated with a refinance, borrowers can evaluate the break even point of recouping same. They can then decide whether or not the refinance exercise is worthwhile in monetary terms. Borrowers may find that the resultant small gain is not worth the hassle of pursuing given the time needed and paperwork required.
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