Should you refinance your home?

With the recent 25 basis point cut in the interest rate, many South African homeowners are wondering if now is the right time to refinance their properties. But is this a good move?

What is refinancing?

Refinancing involves applying for a new home loan based on your property’s current value, rather than the original purchase price. Essentially, it replaces your current loan with a new one, often with the goal of lowering monthly repayments or reducing the loan term to pay off your mortgage faster.

Key factors to consider before refinancing your property

When applying for refinancing, banks will review several factors, including:

• Credit score and credit history: A strong credit score improves your chances of approval.
• Current home loan payment history: Late payments or tapping into excess could affect your eligibility.
• Property value and equity: Home equity is the difference between the current value of your property and the remaining loan balance. If you bought your property for R1 million, for example, and your new valuation is R1.2 million and you still owe R800 000 - the equity will be R400 000.
• Other debts: Banks will also consider your overall debt profile.

Having good credit, stable employment, and sufficient equity increases the likelihood of approval. However, keep in mind that refinancing applications can have a temporary negative impact on your credit score, which may affect other credit applications.

Benefits of refinancing your home

Refinancing offers several advantages:

• Lower monthly payments: A lower interest rate can significantly reduce your mortgage repayments.
• Access to home equity: Free up funds to invest in home improvements, pay off debts, or cover other expenses.
• Shorter payoff term: You can opt for a shorter term and become debt-free faster.
• Savings flexibility: Use the monthly savings to cover other financial needs or make extra repayments to pay off your home loan sooner.

What to do before applying for refinancing

Just like you would do before applying for a home loan for the first time, it is recommended that you shop around for a new home loan. Using a bond origination service like MyProperty can help you apply to all the major banks hassle-free.

• Start with a home loan prequalification at other banks to see whether or not they will able to offer you a better rate. 

• Get in touch with a local real estate agent and ask about a comparative market analysis to determine what value your property is likely to have if you were to put it on the market. Also, ask if they would be able to do a valuation on your property - it will give a better understanding of your property’s value. 

Refinancing costs and savings: crunching the numbers

Refinancing isn’t always a win-win, so it's essential to calculate the potential savings. Consider:

• How much could you save with a lower interest rate?
• Do you have the funds to cover costs such as bond registration, legal fees, deeds office fees, and possible early repayment penalties?

It’s a good idea to consult a home loan expert to understand the full scope of the costs involved.

Is refinancing right for you?

Refinancing can offer substantial savings, but it’s crucial to use those savings wisely. Whether you pay off debt or reinvest it into your mortgage, a well-thought-out plan can help you reach full ownership sooner. Speak to financial advisors and loan consultants to determine if refinancing is the best option for your financial goals.

If you have built up equity, a good credit score, and are looking for better loan terms, refinancing could be a beneficial move. However, be sure to do your homework, shop around for the best rates, and carefully weigh the pros and cons.

What to do if you are not going to refinance

Paying off your home loan faster not only brings a sense of financial freedom but also saves you money in interest over the life of the loan. Consider these strategies to accelerate your home loan payoff:

• Make Extra Payments: Allocate additional funds to your mortgage payments whenever possible. Even a small extra amount each month can significantly reduce the total interest paid over time.
• Bi-Weekly Payments: Instead of making monthly payments, switch to a bi-weekly schedule. This results in 26 half-payments, equivalent to 13 full payments per year, helping you make an extra month's payment annually
• Round-Up Payments: Rounding up your monthly mortgage payment to the nearest thousand (or even hundred) Rand can make a substantial impact over time. It's a painless way to add a little extra to each payment.