Due to the current pandemic situation, many property owners may be contemplating to refinance their properties to free up some cash or to simply stay afloat financially. With interest rates at an all-time low, it could be a pretty good idea to refinance in order to get a lower rate, hence reducing your monthly payments.
What Is Refinancing?
Refinancing involves paying off a current loan and replacing it with a new loan that comes with better terms and interest rate compared to the current one. There are several reasons why you may wish to refinance your loan. If you’re a property owner, you might want to lower the interest rate or could want to improve your credit score. Or maybe you just want to consolidate your debt or reduce your home equity, then maybe you might want to also consider refinancing.
When Should You Consider Refinancing?
This is entirely dependent on your current situation. But it is best to look at current interest rates to get the best out of the whole process. However, it is best to look at the current interest rates when you are considering this process. If the current interest rate is at least 1% lower than your existing rate, that’s a good indication to consider loan refinancing.
Refinancing will be a right option for you under these situations:
-
It will reduce your home loan interest
If you think you’ll benefit better from having a lower monthly instalment compared to your current loan, then you should go for it. For example, if the fixed interest rate of your home loan is 6.6% per annum, and the current interest rate is 4.4%, you will have the advantage of paying 2.2% less interest per annum until the completion of your new refinanced loan. If your property is worth RM400,000, that is a savings of RM8,800.
-
To change your loan repayment period to your benefit
If you are in a financially better position now than when you took the current loan, refinancing will be a good option to shorten your loan period, as now you will be able to pay more monthly. Refinancing can also work to lengthen your loan period, especially when you have a sudden increase in commitment and you can assume that it will be a struggle to continue paying the instalment sum of your current loan.
-
To change from Fixed Rate to Variable Rate and vice versa
If the terms of your current home loan package no longer suits you, you should opt for refinancing. Your current home loan may feature a fixed interest rate (where the interest is not affected by the market conditions) or a variable interest rate (where the interest rate changes according to the market conditions). With a fixed rate, you will not have to worry throughout the tenure of your loan as the rate is unchanging, while a variable rate enables you to pay less when the market conditions are right. Refinancing allows you to switch from one rate type to another according to your current financial strategies.
-
To consolidate your debts
If you find it difficult to repay several other home loans at the same time, a once-off refinancing plan might allow you to consolidate everything into a single account, so you will be getting only a single statement with a single payment every month.
When You Should NOT Consider Refinancing?
Decide to refinance only when you have understood the risks and your financial standings, or else you might end up with more problems ahead.
Refinancing will NOT be a right option for you under these situations:
-
Refinancing costs more than the savings you make
There are fees involved in refinancing home loans. These fees can accumulate easily, especially when switching to a new financial institution that will require a whole new set of assessment and processing.
Most of the time, it takes more than a year to recover such costs and to start reaping the benefits of refinancing. Don’t consider refinancing if you do not possess a strong financial position to hold on to the property until you recover these costs.
-
You have existing financial problems
If your credit score is lower than before you applied for the loan, you might be worse off if you try to refinance your loan. You might end up with loan terms that are worse than your current one as the bank might impose stricter lending conditions due to your weak credit score.
-
Using the cash-out on personal spending
If you have set the purpose of refinancing your loan to cash-out for personal spending instead of clearing debts, you may very well end up with more financial problems in the future than you already have now.
What Are The Costs Involved?
-
Moving Cost
You will have to pay for items such as valuation fees, legal fees, disbursement and stamp duty when you refinance.
-
Lock-In Period
Make sure that you are not bound by your existing loan’s lock-in period. Banks normally charge a penalty of 2% to 5% on your original loan amount if you fully pay it off within the first two to five years. The lock-in period is usually within this time frame, when you will incur a penalty for early settlement.
What Are The Processes Involved In Refinancing?
- Check on your current home loan whether it is still within the lock-in period.
- Contact a few banks to find out about their offers.
- Always negotiate for a better Effective Lending Rates (ELR) and compare all banks’ offers if you are not in a hurry to cash out.
- Finally, choose the plan that suits you the best and sign up.
The statement and information in the articles are the opinion of the writer and meant only as a guide. Any property purchase, rental or lease involve many legal issues and other complication depending on the individual facts and circumstances. Readers and Users are strongly advised to seek professional advise including from qualified and competent lawyers, bankers and/or real estate agent to verify the information and the statement before embarking on any purchase, rent or lease of any property. To the fullest extent permitted by law, we exclude and disclaim liability for any losses and damages of whatever nature and howsoever cause and arising including without limitation, any direct, indirect, general, special, punitive, incidental or consequential.
