Switching loans in the middle of a mortgage term typically entails fees, and borrowers need to know these charges before making the switch, according to a market watcher.
In a think piece in Money Sense, market watcher Jacki Gillard said a mortgage that is not up for renewal or is not in an open term is subject to an interest penalty if a borrower switches.
"The amount is usually three months’ worth of interest payments, or the difference between the interest rate on your current mortgage and your lender's current rate for the amount of time that's left in your mortgage term," she said.
Some prospective lenders entice borrowers to switch by offering an incentive that they can use to offset interest penalties. Gillard said borrowers need to ask their target lenders if this could be an option.
"Keep in mind, though, that adding an interest penalty to your new mortgage balance means paying interest on that interest penalty, while paying penalties from your savings equates to losing the potential return you'd earn on that amount," she said.
Appraisal charges are another potential fee switching loans comes with. Lenders usually have the properties' values assessed again given that refinancing is considered a new home-loan application. Borrowers should ask their prospective lenders if this fee could be waived.
Legal fees are also something to keep an eye on. Borrowers need to determine what kind of mortgage they currently have to know if they are quoted accurate legal fees.
"Mortgages require legal paperwork and lenders hire companies to do it for them, but often charge the cost to you. There are different kinds of legal mortgages, each with its own different fee," Gillard said.
Borrowers might also be charged with a discharge fee, which might be covered by the new lender. Some lenders also charge a property tax administration fee. To avoid having to pay this, borrowers can ask their lenders if they can pay property taxes on their own.