Refinancing – this is one way to reduce monthly installments and the cost of the entire loan. By taking out a new, cheaper loan, we repay the claims resulting from the old, more expensive mortgage. Does such an operation really pay off? And if so, when should you decide on it?
To assess the profitability of refinancing, it is necessary to compare the amount of the basic component affecting the interest rate on the loan, i.e. the margin. The rule is simple here: lower margin – lower interest rate on the loan – lower monthly installment. However, it should be remembered that in addition to capital and interest receivables, some banks require additional insurance, which is always associated with higher costs of the entire loan.
Refinancing for “crisis” clients
People who have borrowed in the first months of 2009 should be particularly interested in refinancing loans. It was the beginning of the mortgage crisis and banks increased their margins drastically then. In the following years we have already observed their systematic decline. To better visualize the benefits of refinancing, it’s worth looking at the following statement. The table shows the profits in a monthly installment that a borrower who borrowed in 2009, 2010 and 2011 can get, with a margin of 2.5, 2 and 1.5%. To calculate the new installment, a uniform margin of 1% was used. The new loan would be taken for 27, 28 and 29 years, so that the combined repayment period of the “old” and “new” loans does not exceed 30 years.
|date of taking the loan||margin||interest||current installment||debt balance||installment of a new loan|
|03.2009||2.50||7.45||1 740||242 466||1 528|
|03.2010||2.00||6.95||1 655||244 688||1 520|
|03.2011||1.50||6.45||1 572||247 179||1 515|
The refinancing loan installment will be lower in each of the examples given. People whose loan has the highest interest rate will benefit the most.
Refinancing for commissions and additional fees
When calculating the profits from refinancing, one should not forget about additional fees, which may limit the planned benefits or even cause that the entire operation will not pay at all. In such cases, the commission for granting the loan and the fee for early repayment of the previous obligation must be taken into account. While a large group of banks do not currently apply this first practice, a penalty fee for early repayment appears quite often in mortgage offers. The table below presents the change in installments if the current bank imposes a 2% fee for early repayment of the loan and adds it to the debt balance, thus increasing the amount of the refinanced liability.
An early repayment fee can significantly reduce the profits on the entire refinancing operation. For this reason, it is worth carrying out it provided that the current bank does not financially “punish” for early settlement of the mortgage. Fortunately, most offers assume that after three years of loan, you can pay back the loan at no additional cost.