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What should you expect when refinancing your home loan in 2023?

John Tran
May 23, 2023
What should you expect when refinancing your home loan in 2023

It can be beneficial to refinance a fixed-rate mortgage in order to access funds or save money, but it pays to be aware of any associated break fees. When you quit a loan early, your lender will charge you break expenses. Depending on the size of your loan and the timing of your exit, these costs can change. 

In this article, we explain what break costs are, how to calculate them, and when should you prepare for the break cost. We will also outline if it is alright to refinance a fixed-rate mortgage and how to avoid break costs when refinancing.

Be prepared with the break costs

Break costs or break fees are a type of penalty that you may be required to pay if you decide to terminate your home loan contract before the end of its fixed rate term. These charges are designed to compensate lenders for losses they sustain when borrowers ‘break’ their terms, such as refinancing their home loan with another lender or paying off the loan early. 

When you repay your home loan in full or close your mortgage with a lender, they may also charge you a discharge fee. This covers the cost of paperwork and administrative processes associated with terminating your loan agreement. Understanding break costs is important if you’re considering refinancing, accelerating payments or paying off your home loan in full before the end of its fixed rate term. Knowing how much you might need to pay in break costs could help you make an informed decision about which option is best for your financial situation.

How are break costs calculated

To estimate the break cost, lenders typically use the formula: 

(Rate when the fixed rate loan was taken out – rate when the fixed rate period ended early) x remaining fixed period of loan x current loan principal = fixed rate break cost. 

This formula helps lenders to better estimate the potential costs of breaking the fixed rate loan period and provides borrowers with an understanding of the associated costs. For this reason, it is important for borrowers to consider their options carefully when deciding if they should end their fixed-rate loan period early. (source: bankwest)

Is it alright to refinance a fixed rate mortgage?

Refinancing your mortgage can be an excellent way to take advantage of more favourable interest rates and features, or to simply switch to a different lender. Although homeowners may be able to refinance their mortgage even if their current loan has a fixed interest rate, it is crucial for them to recognize that they must take into account break costs linked to their current loan.

These break costs are typically paid if you switch lenders before the end of your fixed rate period, and they can be quite significant depending on the size of your mortgage. That's why it's important to factor these costs in when considering whether refinancing is a good choice for you.

It's important to weigh the benefits and drawbacks of your present loan, as well as the rates and features offered by competing lenders when considering whether or not to refinance. It's also crucial to confirm that you can fulfill all the eligibility standards in order to be approved for a new loan. It could be a good idea to speak with a mortgage broker who can provide you professional advise on which loan option is ideal for your situation in order to be sure you're making the best choice for yourself.

How to avoid break costs when refinancing?

A fixed loan contract can be expensive to break, and doing so will result in break costs. Before making any decisions, it's crucial to weigh the costs of defaulting on your loan. Following are some suggestions for reducing or preventing break charges on a fixed loan:

1. Look for lenders that waive break costs: Some lenders could be ready to cover break fees, especially for current clients. Therefore, it's crucial to ask the lender if they may offer you a waiver of break charges or any other concessions before making any decisions.

2. Consider refinancing: If you anticipate that you will need to break your fixed loan contract in the near future, you may consider refinancing the loan. Refinancing to a variable rate loan or a short-term fixed loan can give you more flexibility. However, it's important that you weigh up the costs of refinancing an existing loan against any potential break costs you may incur in the future.

3. Consider negotiating: Some lenders may be willing to negotiate with customers who wish to break their loan. If you have a solid repayment history and can provide evidence of your need to exit the loan, it may be worth discussing this option with your lender.

4. Consider switching lenders: You may be able to switch lenders without incurring any fees if the new lender waives them or covers them. However, it's important to also consider the costs associated with switching lenders such as application fees and ongoing fees.

Last Words

Remember that interest rates are always subject to change and they won’t keep rising forever. Therefore, it’s wise to consider your home loan options carefully as you could end up locked into a fixed rate while the interest rates drop. If you want help deciding which mortgage option is right for you, a Mortgage Broker Melbourne can provide hands-on assistance. Just book an appointment to get started!

This way, you can ensure that you make the best decision for your financial future and have peace of mind knowing that you’ve chosen the most suitable mortgage option.

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