As more economists predict that September 2024 is the month that will see an interest rate cut, it presents an opportunity to consider refinancing your property, at an even better rate.
Refinancing is when you apply for a new home loan for your existing property, based on its current value, rather than how much it was worth when you originally applied for the first home loan. It basically replaces your current loan with a new one, with the goal being to pay off your home loan quicker, or lower your monthly instalment.
Before you start getting excited, consider these factors:
Process:
In the same way that you applied for your first home loan, the process of refinancing is similar.
The bank will, for example, look at:
- Your credit score and credit history will be reviewed.
- Your payment history on the current loan will be considered: if you have made any late payments, tapped into any excess, and how you have handled your repayments overall.
- How much the home is currently worth.
- Equity in the home*.
- All your other debts.
*Equity is the difference between what you paid for the home, what it is currently worth, less how much you still owe. For example, if you bought the property for R1-million, and you still owe R800 000, but it is valued today for R1.2-million, the difference of R400 000 is the equity.
To ensure that you are considered favourably for refinancing, it is a good idea to check these factors yourself, before the bank does. If you have a good credit score, built up some equity in the home, and if you remain securely employed, you will likely be approved.
Note though, that sometimes a refinancing solution can have a negative impact on your credit score, which may impact your future credit applications.
Checklist to Compare First:
Shopping around for a new home loan is recommended.
- Do a pre-qualification with other home loan providers, you’ll be able to decide which of those will be able to offer you the best interest rate and home loan.
- Research similar properties in the area to determine what value your property is likely to have, if you were to put it on the market.
- Call in a property agent and request a free evaluation; the agent will also be able to give you advice around what your money could buy you elsewhere, which may change your mind completely about refinancing.
Crunch the numbers:
- If your decision is to move forward with refinancing, you’ll need to work out what your potential savings are.
- How much savings will come from paying a lower interest rate?
- Deduct associated fees, such as bond registration, a bank initiation fee, post and petties, legal, deeds office fees, early repayment penalties etc.
- Speak to a home loan consultant who can advise on these overall fees.
Benefit potential
- Lower monthly payments.
- Reduced interest.
- Access to the equity.
- Shorter payoff term.
- Monthly savings that can be used elsewhere or to increase monthly repayments and pay off your home loan even faster.
Refinancing is not for everyone. You need to seriously consider that if you are making significant savings from it, that you use those to pay off any existing debt, or put that back into the new home loan structure to further speed up your full ownership. Do your homework and speak to professionals such as financial consultants and banking personnel who will best be able to confirm whether this system will work in your best interests.
