Alternate Title: Mortgage Refinancing Costs: Here’s What You Should Know
It’s tempting to refinance your mortgage when interest rates are low since it could potentially decrease your monthly payments. However, there is a catch! Besides the loan agreement fee, homeowners need to bear other refinancing costs to complete the process.
So, what are the total refinancing costs? Keep reading to find out the different fees you need to pay when refinancing so you can determine if it is still the best option for you. But before we begin, let’s discuss what mortgage refinancing is and the reasons to refinance.
Common Reasons Why Homeowners Refinance Their Mortgage
When homeowners refinance their mortgage, they are essentially applying for a new mortgage with better interest rates or a different monthly payment plan. Take a look at the top reasons to refinance (link to ‘Why Refinance’ article) your mortgage below:
More Manageable Monthly Payments
- The most common reason homeowners refinance is to lower their monthly mortgage payments. You may be surprised how the slightest difference in your mortgage rate can greatly impact your expenses.
Shorter Loan Period
- On the other hand, you may want to refinance your mortgage to secure a shorter loan period. That is, if you can afford it. By cutting a 30-year loan to 15 years, you can pay off your loan sooner and accelerate the process of owning your home.
Save on Total Interest
- Two things determine how much interest you pay throughout the life of your mortgage: interest rate and mortgage term. As you reduce these factors, you can save a huge amount on interest over time.
Total Mortgage Refinancing Costs
The total costs involved in refinancing your mortgage include a variety of fees under moving costs, processing fees, taxes, and any penalty fees that you may be subjected to.
It’s important to note that refinancing costs can vary as different banks charge different fees to finalise your refinancing loan. Hence, it’s always advisable to shop around and compare quotes to get the best deal.
The term ‘moving costs’ refers to all the fees you have to pay when you refinance your mortgage. Here is a breakdown of the moving costs and a brief explanation of each so you can better understand the total refinancing costs required.
1. Property Valuation Fee
The property valuation fee is compulsory, and it is the cost involved when the bank’s panel valuer prepares a valuation report. The report should detail your property’s actual market value and the reasons why it is worth that amount.
After that, your property valuation report will be forwarded to the bank for review. While it is possible to use an external valuer to conduct the appraisal, you should make sure that the bank agrees to it first before proceeding.
A property valuation fee is typically around 0.3-0.5% of the original loan amount.
2. Loan Agreement Fee
When you apply for a mortgage, you will enter into an agreement with your chosen bank called the Loan Agreement.
These documents require a professional bank lawyer to prepare and include specific fees: stamp duty fee, legal fee, and disbursement fee.
In general, these fees can range from 2 to 3% of your loan amount, but they can go higher if your loan amount is less than a certain amount.
- Stamp Duty
- Stamp duty is essentially a tax that you pay to the government. Legal documents like instruments of transfer and loan agreements for property purchases are all liable for stamp duty.
- The stamp duty fee on loan agreements is set at a fixed 0.5% rate, which is applied to the full value of your loan amount.
- Legal Fee
- Again, a fee is required to engage the services of lawyers when you refinance your mortgage. Therefore, a separate fee known as legal fees apply.
- Legal fees are part of the Sales Purchase Agreement and are calculated based on a percentage of the property’s buying prices. Depending on your property’s value, the legal fees can be from 0.5% to 1%.
- Disbursement Fee
- As the appointed lawyers prepare your Loan Agreement, they may incur various expenses.
- The lawyers will usually bear these costs on your behalf to facilitate your mortgage refinancing process and add them to your total refinancing costs for reimbursement later.
- These may include general operating expenses, travelling, and printing expenses—all of which contribute to the category of fees you need to pay called the disbursement fee.
3. Bank Processing Fee
Your bank may charge you a fee to process your mortgage refinancing application as soon as you accept their offer.
Some banks refer to this fee as an ‘account set up fee’ or ‘opening account fee’. But they all mean the same one-time fee charged for processing your application.
Not all banks require you to pay this fee, so finding a bank that waives the bank processing fee could lower your overall refinancing costs.
4. Outstanding Fees & Taxes
To increase your chances of experiencing a smooth mortgage refinancing process, it’s imperative that you pay off any outstanding fees.
After all, you wouldn’t want the developer or the maintenance office to withhold the necessary documents to process your refinancing application just because you owe them money.
The bank is also obligated to ensure you have been keeping up with your quit rent/parcel rent and assessment tax before they proceed with your refinancing application.
- Quit Rent/Parcel Rent
- Quit rent is also referred to as ‘cukai tanah’, and it is the tax that the state government charges you for land ownership. The amount of quit rent payable is determined by the size of your land.
- As for homeowners with strata properties like condominiums, apartments, and gated communities, the tax imposed is called parcel rent. For strata properties, the tax amount is based on the size of homeowners’ units.
- Assessment Tax
- Your city council collects and uses the assessment tax to maintain the neighbourhood that you live in. The tax rate varies every year and may be different from one council to the next.
- According to the Local Government Act 1976, Sections 147 and 148, any unpaid tax will be considered as arrears or outstanding balance.
- So don’t leave your assessment tax unpaid if you want to refinance your mortgage without any hiccups.
5. Penalty Fees
Most banks have a 3 to 5-year lock-in period for home loans. During this period, homeowners are not allowed to refinance or sell their property. Nor are they allowed to fully settle their home loan via cash or EPF withdrawal.
If you insist on closing the loan account, you are required to pay a penalty fee of about 2 to 3% of the original home loan amount. Therefore, you should always check if you are still within the lock-in period before making a final decision to refinance.
6. Mortgage Reducing Term Assurance (MRTA) – Optional
Borrowers can apply for the MRTA as insurance to cover the outstanding loan amount in the event of unforeseen circumstances, such as death or total permanent disability (TPD).
Plus, getting full coverage is not a must, as you can choose your coverage amount and coverage years. Before you commit to a figure, you can discuss it with your banker or insurance agent. Do note that the cost of MRTA varies with your age, coverage amount, mortgage interest rate, gender and years of coverage.
The MRTA is a one-time payment that can be paid in cash or through the loan itself. While the MRTA is not compulsory, banks generally offer lower interest rates for mortgages for loan applicants with MRTA.
How Bluebricks Can Help You
Refinancing costs might be the least of your troubles once you start thinking about all the requirements you need to meet to qualify for a loan. If you’re worried, you should consult a loan specialist.
Whether you’re a first-time refinancing applicant or you have been trying and failing to get your loan approved, Bluebricks can help you. Our professional team has years of experience helping clients with loan applications and is ready to help you meet your refinancing goals.
Leading Loan Agency Company in Malaysia
Bluebricks is a trusted financial consultancy company in Malaysia providing loan consultancy and loan rejected services. If it’s your first time submitting a loan application, we offer FREE consultations, CTOS and CCRIS reports.
Furthermore, you won’t be charged any upfront fees until your loan is secured. Consult Bluebricks to see how you can maximise your chances of getting a refinancing loan approved.
Loan Rejected Services
As a leading loan rejected service provider, Bluebricks offers total refinancing loan rejected services. Our experts can help you identify the underlying reasons behind your failed applications.
With our knowledge and expertise, we can devise effective strategies to secure approval for your loan. Explore how Bluebricks’ refinancing loan rejected services can help you reach your financial goals today!
Refinancing Costs – FAQs
There are many costs that come with refinancing your mortgage. To help you understand more about your refinancing costs, we’ve compiled a list of frequently asked questions and their respective answers.
1. How can I lower my refinancing costs?
Since banks look at your loan-to-value ratio to determine your interest rate, one way to lower your refinancing costs is by simply borrowing less than your home’s value.
2. Do I have to pay tax on a cash-out refinance?
If you go for a cash-out refinance, you don’t need to worry about paying taxes on the cash you acquire since it is considered a loan instead of income.
3. What is a Zero Moving Cost Refinancing Home Loan?
Zero moving cost home loans absorb all moving costs that are usually charged to buyers.
This type of refinancing package saves homeowners some money, but it may have drawbacks such as longer lock-in periods and a minimum loan amount requirement. Moreover, some banks may charge an additional 0.5% mortgage interest when you refinancing using their zero moving cost packages.