Thinking of refinancing your home? Read this first…
People often talk about refinancing their home loans and I’ve been asked how one can go about doing this.
Before we look at the process and potential costs involved, let’s look at the WHY…
Why do people refinance their home loans?
It’s all about the money. That’s why.
Your home may be worth R1.2 million right now and yet the outstanding amount left on your loan is only R550k. If you qualified for a new home loan of R1.2 million then you would essentially receive a cash payout of R650k.
This is very tempting for many people but it’s important to understand that you are taking out a new home loan for a duration of at least 20 years and will be starting again. The “cash payout” that you receive is actually your own money that you have been paying and you will end up paying much more back to the bank.
Also note that a new bond incurs a new bond initiation fee as well as legal costs and the process could easily cost you R20k or more. The costs will usually be added to the loan amount so you won’t notice them upfront, but you’ll be paying for them!
So why do people do it?
Refinance an investment property to access funds
If you own an investment property in a trust or other entity then it could be a good idea to refinance it in order to access funds and grow your investments. Within a legal entity one could optimise the annual tax liabilities by offsetting the profits and losses from the investment.
It can be very beneficial to refinance your properties but you need to know what you are doing as it could end up disastrous! Consult with a professional who understands property leverage and the entity and tax implications of your investments.
Refinance your home loan to get a better rate
If you’re planning to refinance your home in order to get a better interest rate then this is probably not a good idea. It depends on how long you have had your existing loan account as well as the difference in interest rate.
If you are still within the first 5 years of the loan period it might be beneficial to switch but you would need to ask for quotes which show much much interest you would save versus the costs involved in switching.
Don’t be fooled by the cash payout that you are offered as this is not actually your money. It’s the banks money and you should ideally put that straight back into the bond or better yet, only take a new bond equal to your current outstanding bond.
You will however find that your new payments could be less than your current payments which would probably make you happy. The truth though is that you’ll just be paying the bond off for longer and pay more money!
Refinance your home to access funds with which to renovate
This is a tricky one and not a decision to be taken lightly. People are always quick to say that any renovation to your house is an investment. Is it though?
It could be and it could add value, but these things are quite subjective and it’s worth consulting with a few experts before installing your dream kitchen. Of course, if you just want the dream kitchen and aren’t doing it for the potential investment then that’s a different story!
Again, refinancing your home and taking a cash payment may be super handy and really useful, but is it worth the long term cost? You can learn how to do all the home loan calculations you need by taking this online course, or you can use online calculations to get some rough numbers. Do your homework though!
Refinance your home to ease the monthly financial strain
If you’re struggling to pay your monthly payments and wish to refinance to reduce the instalment then that should be a warning sign that something is wrong! If this is the case, I would strongly advice speaking to a debt counsellor or professional financial advisor who can look at your finances holistically and give you sound advice.
Simply extending your debt period to get a smaller monthly instalment may not be the ideal solution (although it would obviously help in the short run)
How do you refinance a property?
Refinancing your home loan is a simple process and is virtually the same as initially applying for a loan. There are generally two options available:
Small refinance amount with minimal requirements
Some banks allow for a small refinance amount of around R100,000 with minimal admin. You would go through the standard credit checks and the additional monies would simply be added to your current loan. You may qualify for this on your existing loan and may simply need to contact your bank to access it.
New home loan
The other route is to apply for a new home loan at any institution. You could first speak to your current provider but you can go to any finance provider and make a new application. If granted, you would need to cancel your existing loan and then start the new one but the bond attorneys will do all of that for you. You simply need to provide the necessary documents and sign where asked and the rest will be done.
You will be charged a bond initiation fee (around R6,000) and bond attorney fees (R10k or more). It is the same process as when you originally took out a bond.
It’s pretty easy to refinance your home and get access to a cash lumpsum. This however may not always be a good idea as you are really just extending your debt and committing yourself to a longer period of paying it off.