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 holiday, 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 challenging 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 you must understand what a refinance means. Just because you pay less monthly does not necessarily mean you are better off.

What should you be looking out for?

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 also charge fees and want you to pay for them.

So, they charge an application fee to process your refinancing request.

This fee can vary considerably between lenders, so it’s wise to check each one before you decide 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

You must pay registration fees and stamp duty depending on your state or territory.

Lenders’ mortgage insurance (LMI)

Banks take on risk, and you pay them an interest rate for that risk. 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 arise during the refinancing process.

So, before you refinance, check whether it is worth it.

While the upfront costs 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 and dancing. That was because the refinance costs ended up at $6,000, or 3% of the loan amount. This meant there were no savings for the first 8 months of the new loan.

But there are other 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 requires the involvement of a few people, too, so think about the time it will take. If you are time-strapped, this is going to be frustrating.

Refinancing only sometimes leads to savings. It’s important to carefully compare your current loan with potential new ones by considering all the costs involved. Sometimes, the savings might need to be more significant to justify the hassle and expense of refinancing.

Refinancing is step 5 of our 9 steps to working less, earning more, and building wealth. If you would like to know more, contact Hitesh@wowadvisors.com.au or Ros at ros@wowadvisors.com.au or call us on 07 3161 9548.