As soon as interest rates go down then refinancing is in the news again. But, GPF home loans urges clients to to ask themselves if it is a sensible (financially speaking) to refinance their home loan. But, what does it mean to refinance your home loan? If you refinance your home loan it basically means that you’re asking your lender to cancel your current home loan and to replace it with a brand new home loan. Do not forget that there will be costs involved to set up a new loan with different terms and conditions.
Usually these costs are rolled into your new mortgage which will ultimately increase your loan amount. One of the biggest reasons people refinance their mortgage is to decrease their current home loan payment by extending their home loan terms. Although this might seem like a great deal initially it may not be such a good idea over the long term since it will take longer to pay off your home loan.
Most people in South Africa take out a 20-year home loan. Say you decide to refinance your home loan at the end of 10 years; you’ll reset the clock to 20-years. Instead of paying off your mortgage in 10 years at this point in time, you’ll be now paying on that home loan for a total period of 30 years. If your initial mortgage was amortized for 20 years on a R1 million home loan at 10% interest, your monthly payment is R 9 650. If you refinance that home loan at R 1 050 000, at 9%, your new payment is R9 447.
Your mortgage will reset to a 20-year term. The majority of home owners select a 20-year amortization period. You will make an additional 120 months (10 years) and pay R1 133 640 more over the life of the mortgage.
So, does this seem like a good deal for you? Definitely not! To make matte worse some home owners take out money from a refinance deal to pay off credit card debt or go on expensive holidays. If you went on a 2-week holiday to Mauritius, for example, you now managed to finance your holiday for 20 years, and this for 2-weeks of fun in the sun.
Refinancing can work for you IF you do not extend the loan term and manage to significantly reduce your interest rate. By doing this you will quickly recoup your costs from refinancing your home loan and reap the benefits of lower payments. But, do your calculations first before jumping into something.