As a property investor who needs extra funds, refinancing might look like the easiest option.
Think again. Banks know that they’re your go-to, so they have less motivation to make it easy or affordable.
From set-up fees to closing fees, plus every hidden admin fee in between, refinancing can end up being much less attractive than you thought.
Ready to get real value out of your time, effort, and investment? In this blog, we explore the true costs and the alternatives.
Why Do the Hidden Costs Make Top-Up Refinancing a Bad Idea?
Exactly how much top-up refinancing (also called “cash-out” refinancing) sets you back in hidden costs depends on your situation and lender. On average, the costs are $2,082. If you end up paying break fees or lenders’ mortgage insurance (LMI), it could run well into the tens of thousands of dollars.
In other words, the hidden costs of refinancing can add up and send your expenses skyrocketing. Even worse? The costs are generally charged upfront.
That’s important for investors. If you have tight budgets or you’re borrowing because you don’t have a lot of cash to hand, those upfront costs can seriously damage your cash flow.
For instance, if you were accessing $30,000 through refinancing, you could incur fees of 6.9% ($2,082) even before interest payments, break costs, or LMI.
A lower interest rate might let you recoup the costs over time through the long-term savings but, if you’re a property investor seeking funds, the hidden costs might mean top-up refinancing just doesn’t stack up.
Unlike traditional lenders, Futurerent only charges one fixed cost. This cost remains the same throughout the repayment term, even if paid off early or extended.
What Are the Hidden Costs of Refinancing a Home Loan for a Top-Up?
To give you some perspective of the scale of these hidden costs, let’s look at a breakdown of the most common fees, with an estimate of how much they could cost.
The costs will vary depending on your circumstances and lender. Sometimes the bank may cover or waive certain costs, but in other cases they won’t be as flexible. To find out exactly what you’d need to pay, speak with your lender.
What are the fees?
- Establishment Fee: For setting up your refinanced loan.
- Discharge Fee: To close your current loan account.
- Property Valuation Fee: For your bank to measure the market value of your property and assess their risk if you’re forced to sell. Depending on the type and complexity of the property, this varies a lot.
- Settlement Fee: An administrative charge to finalise the refinance.
- Switch Fee: A fee for refinancing with the same lender.
- Mortgage Deregistration and Registration Fee: Government costs for deregistering the old mortgage and registering the new one.
- Title Search Fee: A government fee for verifying property ownership before refinancing.
- Legal Fees: To cover legal work, which may include your legal costs and the lender’s.
- Exit Fee: For closing a loan early.
Estimated total range: $990 – $3,175
Average: $2,082 (plus interest)
You might think it’s disingenuous to charge fees for services like these. You can’t take out the loan without someone setting it up, so how can it be an additional charge? You’re right to ask.
Remember too that this is a conservative estimate of average cost. It could be much higher once you include interest payments, break fees, or LMI charges.
Put simply, if you’re refinancing for an extra $30,000, prepare to pay 6.9% ($2,082) of that in fees upfront.
What If You’re on a Fixed Interest Rate or Your Loan-to-Value Ratio Is High?
You might be in for a shock.
Banks require you to pay a break fee if you refinance during a fixed-rate term. If your Loan-to-Value Ratio (LVR) is above 80%, you’ll also generally be charged LMI when refinancing. While the numbers depend on your situation, break fees and LMI could each easily reach tens of thousands of dollars.
- Break fees: Generally, the three main factors that determine your break fee are your loan amount, remaining fixed-rate term and, how much interest rates have come down since you locked in your rate.
- LMI: You could pay up to $19,000 in LMI when refinancing a $700,000 investment property with an LVR of 90% in NSW. LMI costs will increase exponentially with higher LVRs and higher property values.
These factors combined mean refinancing can become a financial burden rather than a solution, particularly for investors looking to expand their portfolio.
Alternatives to Refinancing for a Top-Up
The good news is there are other ways to access funds and achieve your investment goals without having to deal with all those hidden costs.
1. Equity Release
Equity release lets you access the value you’ve built up in your property with either:
- A redraw facility, so you can withdraw extra repayments you’ve made on your loan, or
- An offset account, like a savings account linked to your loan, where the balance reduces the interest you pay, but you can also withdraw money.
These are reasonable options if you have significant equity and a variable-rate loan.
2. Line of Credit Loans
A line of credit loan lets you borrow using your property as security. You can take out and repay funds when you need, much like a credit card. It’s useful for ongoing expenses like renovations, but the rates are usually even higher than regular refinancing.
3. Alternative Income-Based Options
An easier and less expensive option is to get an advance payment on your rental income. Futurerent can give you an advance on your rent for a fixed fee, taken from part of the rent paid by your tenants.
Because it doesn’t increase your debt or require lengthy credit checks, this can be a much better option for any investor, but especially those with limited equity.
How much does it cost to use Futurerent?
With Futurerent, accessing $50,000 rent in advance costs $16,348 over 3 years including setup fees, with zero hidden fees or interest. Unlike traditional refinancing, there’s no other cost you need to account for.
Money Can’t Buy Time and Effort
It’s not just the money, but what it means for your time too.
Top-up refinancing is time-consuming and complicated. Investors wait as long as three months for funding. How much rent could you have generated in that time? How many good properties come and go from the market?
Alternatives like personal loans are often faster but might come with a catch, such as higher interest or extra restrictions.
Your time and effort are priceless. That’s why Futurerent cuts out the rigmarole. You’ll be onboarded in minutes and, if approved, we fund your rent in advance within two business days.
Deciding If Refinancing Is Right for You
How can you decide if refinancing is worthwhile? Ask yourself:
- What’s the total cost? Use a refinancing calculator and make sure to include all the fees and extra charges, not just interest.
- How much can you save long term? A lower rate might come with higher charges, so be careful about what represents a true saving.
- What are your financial goals? Your refinancing strategy should align with your broader property investment or cashflow strategy.
The hidden costs of refinancing are hefty, even before accounting for interest, break costs and LMI. By understanding the full cost of refinancing, you can make more informed decisions.
To avoid the costs of top-up refinancing, use Futurerent. With an advance payment on your rent, with much less paperwork and complete transparency on cost, you can finance in a way that still means your investment is worthwhile.
Smart investing starts with knowing your options. If you take the time to weigh the pros and cons, you can achieve your goals with confidence.
Use our online calculator to help you weigh up the costs and make the right financial decision for you.
FAQs
- What’s the average cost of refinancing for a top-up?
Costs range from $990 to $3,175, averaging $2,082, but costs vary by lender and circumstances.
- Are there risks to refinancing during a fixed-rate term?
Yes, you could incur hefty break fees based on loan amount, time remaining, and how rates have changed.
- Is it worth refinancing for small amounts like $20,000–$30,000?
Given the hefty hidden fees, refinancing for small amounts might be expensive. While you’ll need to consider your own circumstances, Futurerent’s cost is fixed and transparent, giving you a very efficient way to access up to $100,000 on each investment property.
