Financing a home is a long term commitment and while it may be tempting to refinance when there seems to be better interest rates offered by a multitude of banks, it is important to first know the basics of refinancing and what it entails. iProperty.com speaks to experts from five banks about things to look out for before and after deciding to refinance

What is Refinancing?

“Refinancing refers to paying off an existing loan or mortgage with funds secured from a new loan. Most times, the new loan will be of the same value or higher than the existing loan, and homeowners might use the same property as collateral to apply for refinancing,” explains Goh Ching Chee, director for mortgage business at Citibank Berhad.

According to Abdullah Abdul Rahman, head of mortgage at Maybank’s consumer banking department, it is possible to get ‘extra cash’ by taking advantage of the property’s rising value to obtain a larger loan amount. As the refinanced loan pays off the current home loan, home owners will have a balance for other expenditures.

In a nutshell, to refinance is to switch the financing of your current home loan to another financial institution to enjoy more favourable lending conditions, says Moey Tan, Hong Leong Bank’s chief operating officer of personal financial services.

According to Tan, homeowners should consider refinancing their existing home loan if there are significant savings to be enjoyed by doing so.

“Take for example, Mr Lim’s case who in 2004 took a 30-year housing loan for RM300,000 with effective interest rate of 6.55 per cent. His current monthly instalment is RM1,907. In 2009, Mr Lim’s outstanding loan amount is RM280,000. Mr Lim could opt to refinance his loan with Hong Leong Bank to enjoy BLR (base lending rate) minus 2.20 per cent per annum for whole loan tenure of 25 years,” she explains.

Why Refinance?

“Homeowners choose to refinance for several reasons. They may want to save interest cost by replacing their current loan with a more cost-efficient home loan package offered by their bank or another bank; reduce monthly mortgage payment; lessen or increase their loan tenure; and possibly, use funds for medical payments, children’s education or consolidate all their other debt into one that has the lowest interest charges,” says Goh.

According to him, the timing that homeowners select to refinance their loan depends on their financial needs and obligations. “Usually, refinancing becomes popular when interest rates are lower. People start calculating their mortgage interest rate, and look for more value-for-money mortgage packages in order to enjoy the greatest savings.

“Nevertheless, customers are urged to contact their banks first, before they make any decision towards this end, in order to negotiate for a lower level of interest rate levied, before seeking loan packages from other banks,” says Goh.

The primary reason for refinancing is to reduce current interest rate, monthly repayments and/or loan tenure. According to Abdullah, home owners may want to lower monthly repayments to set aside money for other uses or to save in an investment product every month.

“If you think interest rates may rise, you may want to refinance to a fixed rate loan. Another reason for refinancing, particularly if your home has increased substantially in value, is to tap into your home equity for additional funds for emergency and other ventures,” says Abdullah.

“An important and often overlooked reason for considering refinancing is to consolidate your debts and deposits for better cash flow management. Refinancing can be one of your first steps towards spring cleaning your financial state of affairs. If you are paying high credit card or overdraft interest, you may want to clear some of this debt to save you money in the long run,” he adds.

Therefore, says Lim Keatky, ING Insurance Berhad’s head of mortgage, refinancing can be considered if homeowners are looking to meet the following objectives:

“The pros of refinancing are that homeowners may receive more favourable loan terms and conditions in terms of interest rates, prepayment conditions and more as compared to their first loan. On the other hand, the cons include incurring additional costs to perfect the loan agreement and to pay off stamp duty. If these costs are already covered by the financier, the loan will usually be imposed with a higher interest rate. Additionally, fresh terms may also be imposed in a refinancing arrangement for example, the lock-in period will probably start all over again,” says Lim.

Things to Look Out for

According to Lim, homeowners who opt to refinance should be aware of the costs that they will need to incur to complete the whole refinancing process.

“This includes any fees or penalties that their existing financier may impose upon exiting from their existing loan contract. In addition, a responsible financial institution that offers professional advice and excellent customer service is also a key consideration because the borrower and lender will be establishing and engaging in a long term relationship for the whole duration of the loan tenure,” he adds.

Peter England, head of retail banking of CIMB Bank Berhad, cautions home owners to consider the savings versus costs incurred if their primary goal of refinancing is to lower the rate charges.

“Sustaining a longer term relationship with your banker is probably a less costly option and helps build your credit ratings with the financier. Consumers with fixed rates may be tempted to refinance especially with the lower BLR and BFR (base financing rate) currently. As with other financing, lock-in periods and associated penalties apply,” says England.

Apart from understanding the banker one intends to have a long term relationship with, there are several other considerations too, he says. When opting to refinance, home owners should ask themselves the following questions:

“Home financing is a long term commitment that generally spans between 15 and 30 years. The cost of home financing can vary especially where there is substantial volatility in rates. The best thing to do is to have a discussion with your banker about re-pricing your existing home financing,” says England.

Watch out for Refinancing – Part 2 in which our experts talk about when to refinance, the process of refinancing, as well as the myriads of home loan related products and services available in the market.