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How a cashback deal may help cut the cost of refinancing

How a cashback deal may help cut the cost of refinancing

Refinancing a home loan may feel like a costly endeavour not worth the trouble, but new research from RateCity shows that a borrower taking advantage of cashback deals may break even before they’ve made their first new mortgage repayment.

One of the biggest perceived barriers to refinancing a home loan is the assumed upfront cost involved. However, with a range of lenders putting competitive cashback deals on the table, borrowers may be able to cut down this cost and get on top of their debt faster.

According to the RateCity database, these are the current smallest, largest and average costs of refinancing fees a borrower may face.

Refinancing costs

Smallest

(Excl. $0 fee)

Largest feeAverage

(Excl. $0 fee)

Settlement fee$60$630$195.20
Discharge fee$75$895$305.75
Application fees$140$995$500.63
Legal fees$150$700$327.52
Total upfront fees$140$1,564$583.41

Source: RateCity.com.au. Data accurate as of 22.03.2021. Excludes $0 results. Additional refinancing costs, such as lender's mortgage insurance, will depend on an individual's mortgage. 

Keep in mind that a range of home loan lenders not only charge $0 for these fees, but many be willing to pay for a borrower’s settlement and discharge fees and/or waive upfront costs to get new customers on to their books. 

While the larger of these costs may feel intimidating, the savings a borrower may earn by refinancing to a lower rate and/or lower fee mortgage are considered to outweigh these costs after a number of years, generally speaking.

The real cost of refinancing a mortgage

With a high number of cashback deals on offer for refinancers, the cost of refinancing your mortgage may be more affordable than expected.

RateCity crunched the numbers on how much a borrower refinancing to a big four bank’s 3-year fixed rate may pay in upfront fees.

Big four bank lowest fixed rate loans – fees

CostCBAWestpacNABANZAverage
Application fee$0$0$0$0$0
Settlement fee$200$0$0$0$50
Valuation fee$0$0$0$0$0
Legal fee$0$0$0$0$0
Annual fee$395$395$395$395$395
Discharge of pre-existing mortgage registration fee$143.50$143.50$143.50$143.50$144
NSW - Mortgage Registration fee$143.50$143.50$143.50$143.50$144
NSW - Title Search fee$20$20$20$20$20
Discharge fee from previous lender$350$350$350$350$350
Total cost of refinancing without cashback$1,252$1,052$1,052$1,052$1,102
Cashback-$2,000-$3,000-$2,000-$3,000-$2,500
Total cost of refinancing-$748-$1,948-$948-$1,948-$1,398

Note: Big four bank’s lowest rates are package rates that have an annual fee of $395. Government fees are based on refinancers in NSW. The title search fees are estimates only and can often range from between $10 - $30. Title search fees are averaged as figures slightly differ across the market. Data accurate as of 22.03.2021.

A borrower looking to refinance to a big four bank’s 3-year fixed rate may be looking to pay $1,102 on average in upfront fees.

But when you factor in cashback deals on offer, the borrower may be ahead before they begin, even before you factor in the savings from a lower interest rate. In fact, when you include the cashback offer, the average new customer is $1,398 better off from refinancing.

What cashback deals are available?

Ratecity research found that 23 lenders are currently offering cashback deals ranging between $1,500 and $4,000.

Interestingly, most cashback deals are specifically for refinancers, indicating that banks are targeting borrowers hoping to take advantage of the current low-rate environment as potential new customers.

Home loan cashback deals on offer

LenderCashback value
ANZ (broker only)$ 3,000
CBA$ 2,000
NAB$ 2,000
Westpac$ 3,000
Reduce Home Loans$ 5,000
Bank of Melbourne$ 4,000
BankSA$ 4,000
People's Choice Credit Union$ 4,000
RAMS$ 4,000
St.George Bank$ 4,000
HSBC$ 3,288
Bank of Queensland$ 3,000
P&N Bank$ 3,000
Virgin Money$ 3,000
Credit Union SA$ 2,500
Bank of China$ 2,288
Bankwest$ 2,000
CUA$ 2,000
MyState Bank$ 2,000
Newcastle Permanent$ 2,000
Police Bank$ 2,000
86 400$ 2,000
BankVic$ 1,500

Source: RateCity.com.au. Data accurate as of 22.03.2021.

Note: Reduce Home Loans is offering $5,000 cashback for home loans of $1+ million. All big four banks are offering cashback deals (ANZ through a broker). Most cashbacks are for refinancers only.

Keep in mind a borrower will still need to meet the eligibility criteria set by a new lender to be approved for a cashback deal on a refinancing loan, including a good credit score and meeting minimum income requirements.

There is more to a home loan than the cashback deal on offer. You will still want to consider the interest rate, fees, features and other factors of a mortgage before refinancing. Comparison tables and calculators may be helpful in allowing borrowers to compare apples with apples and view how different loan options and their repayments stack up, side by side.

Did you find this helpful? Why not share this news?

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

What is upfront fee?

An ‘upfront’ or ‘application’ fee is a one-off expense you are charged by your bank when you take out a loan. The average start-up fee is around $600 however there are over 1,000 loans on the market with none at all. If the loan you want does include an application fee, try and negotiate to have it waived. You’ll be surprised what your bank agrees to when they want your business.

What fees are there when buying a house?

Buying a home comes with ‘hidden fees’ that should be factored in when considering how much the total cost of your new home will be. These can include stamp duty, title registration costs, building inspection fees, loan establishment fee, lenders mortgage insurance (LMI), legal fees and bank valuation costs.

Tip: you can calculate your stamp duty costs as well as LMI in Rate City mortgage repayments calculator

Some of these fees can be taken out of the mix, such as LMI, if you have a big enough deposit or by asking your lender to waive establishment fees for your loan. Even so, fees can run into the thousands of dollars on top of the purchase price.

Keep this in mind when deciding if you are ready to make the move in to the property market.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

What's wrong with traditional ratings systems?

They’re impersonal 

Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years. 

You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others. 

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

They’re not always timely

In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year. 

The assumptions are out of date 

The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years. 

The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration. 

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

When should I switch home loans?

The answer to this question is dependent on your personal circumstances – there is no best time for refinancing that will apply to everyone.

If you want a lower interest rate but are happy with the other aspects of your loan it may be worth calling your lender to see if you can negotiate a better deal. If you have some equity up your sleeve – at least 20 per cent – and have done your homework to see what other lenders are offering new customers, pick up the phone to your bank and negotiate. If they aren’t prepared to offer you lower rate or fees, then you’ve already done the research, so consider switching.