If you’ve ever sought opinions from people on whether to refinance your home loan, nearly all of them would answer in the affirmative; most probably, you too have at some time thought that it was a sound financial idea.
After all, refinancing your home loan can often mean getting a better deal on your credit.
But, the answer is not as straightforward as it seems; there are several factors to consider before deciding to refinance your home loan.
Here, we look into these factors in detail to ensure that you don’t lose the advantage when refinancing your home loan.
Consider Market Interest Rates and Loan Repayment Periods
If your home loan has a partially fixed interest rate, you may start thinking about refinancing it.
Shop around for banks and financial institutions offering the best interest rates with the most favourable terms on home loans. Paying lower interest rates on your credit facility, say 2% less than your previous interest rate, may mean you’ll save thousands of dollars when you eventually finish paying off your home loan. Anything that saves you money, in the long run, is always a good idea.
However, don’t just look at the interest rates alone. You should also consider the duration of the loan repayments.
A slightly lower interest with many more monthly repayments may mean that you’ll end up paying more on your second loan than you would have on the original facility.
Look Into Debt Consolidation
By consolidating all your credit into one new debt with a single creditor, you’ll undoubtedly pay a lower interest rate on your new loan. A home loan constitutes one the highest amounts you owe, so consolidating it with your other debts means that it can save you a sizeable amount on the total.
However, by consolidating your home loan and other types of credit into one credit facility, may also mean that you may no longer have a favourable credit mix.
An added advantage of consolidating all your credit into one loan is that the loan repayments become more comfortable and sustainable in the long run. Should you experience a difficult financial period, you can negotiate with one creditor about making lower repayments for one credit.
This situation is more desirable than negotiating lower loan repayments for a period, on multiple debts, with several creditors, all with their terms and conditions.
What Hardship Program Is Your Lender Offering?
Your home loan is a significant debt that has longer duration repayment periods. At one point in the two decades or so that you’ll be repaying your loan, it is likely that you may go through a period of financial difficulty.
Compare the hardship program offered by your lender against those of other lenders, before deciding to take a home loan facility with any one lender. You may find one offering a better hardship program than the other.
If the terms of credit and interest rates are appealing, it can be a good idea to refinance your home loan to take advantage of the better deal.
What Equity Stake Do You Have?
You should only refinance your home loan if you own a sizeable equity percentage on your home.
A good equity percentage, usually above 20%, means that you are likely to get a lower interest rate and favourable terms of credit on your home loan facility.
You’ll also not incur additional costs such as the creditor including a mortgage on your home, at your expense. In such instances, you may end up losing more than you intended to save if you opt for refinancing, and in the worst-case scenario, lose your home.
Forego Refinancing Your Home Loan If You’ve Cleared Most Of The Debt On Your Home
If you have paid off a majority of your home loan, it may be best to see out the loan and forego refinancing. This consideration comes about because you’ve already built up a long history of repayments, and your lender may offer you a much lower interest rate on future loans.
Deciding to refinance at this stage may be counter-productive. You may end up ultimately paying more money on your repayments, shooting yourself in the foot in the process.
Choosing to refinance your home loan is not a ‘fly by the seat of your pants’ decision. It requires getting all the prerequisite knowledge and making accurate calculations of all fees that might be imposed on you should you choose to refinance.
If the considerations for refinancing your home loan are all favourable, and you have a good credit score, go ahead and apply for refinancing with the lender of your choice.
However, if you have low equity or are almost through with your mortgage, it would not be a good idea to refinance your home loan.
Factor in the fees — such as stamp duty and discharge fees — levied on you when you decide to refinance your home loan, as well as other factors that may affect you significantly before you undertake this course of action.