Refinancing a loan is where we change the interest rate levied on the loan or the tenure of the loan. Technically, a new loan is taken that is used to prepay the existing loan. This option is available only for home loans.
We look at refinancing an existing home loan for one or more of the following benefits –
- Particularly, in loans with floating interest rates, it is likely that the rate being charged to us is more than what is being charged on new loans.
- We don’t want to have a debt in our finances when we enter retirement. This may require us to tweak the tenure of an existing loan.
- In periods of favorable interest rates, the opportunity to gain value out of extending the tenure of the loan becomes available to us.
- Further, there may be a requirement to effect some changes in our cash flows, wherein the refinancing option may become useful.
It is prudent to periodically enquire as to what the current lender is charging on new loans, then compare it with what other competitor lenders are doing, and then make a cost benefit judgement towards the refinancing decision. Simultaneously, we will look at our own finances and ascertain the need to adjust the tenure of the loan.
Usually the lender will charge a processing fee of around 1% of principal outstanding at the time of refinancing. In most cases, both the principal outstanding and the processing charges will be provided by the new loan and the combined value will become the new loan’s principal. This is a good option. If this is not available to us, then we will have to pay the charges ourselves.
All financial decisions should be taken within the construct of our comprehensive financial plan. A professional financial planner can and will assist with assessing the suitability of this option specific to our circumstances.