Should I Refinance My Home Loan?

Published on December 3, 2020

By iMoney Editorial

Given the current situation caused by the pandemic, many property owners may be considering refinancing their properties to free up cash to settle other high interest debts or simply to stay afloat financially.

Should you remortgage? How much can you really save by refinancing? With interest rates at an all time low, it may seem like a good idea to refinance to get a lower rate and reduce your monthly payments.

This decision should not be taken lightly and you should carefully calculate the costs of refinancing to see how much money you can actually save by making this move and how long you will need to break even to ensure the move actually saves you money.

If you’re actively looking to make changes to your home loan in order to suit your current financial requirements, read on to find out more about remortgaging.

What is home loan refinancing?

Home loan refinancing refers to the act of replacing an existing home loan with a new loan under differing terms and conditions. In layman’s term, think of it as borrowing money again to pay off the debt you owe in your current home loan account.

You refinance your home loan when you take out a new mortgage on the same property you already own, either to replace the existing home loan or to borrow money against your own property.

When should you consider refinancing?

This is entirely dependent on your current situation. However, a general rule of thumb for when to consider refinancing is to look at current interest rates. If the current interest rate is at least 1% lower than your existing rate, that’s a good indication to consider loan refinancing.

And we all know that interest rates are at an all-time low.

One thing to note is that Base Rates (BR) which replaced the older Base Lending Rates (BLR) in Malaysian banks are affected by the Overnight Policy Rate, which determines the cost to borrow money as set by the central bank. Whenever the OPR goes down, banks can pass the cost savings to home loaners through a lower BLR and BR.

On July 7 2020, Bank Negara Malaysia reduced the OPR for the fourth time within the year to 1.75%, the lowest rate it’s ever been since 2009. This reduction by BNM was made to help kickstart the economic recovery due to COVID-19 but as a home-owner, a lower OPR would be better for refinancing as you can opt for lower monthly repayments due to banks reducing their effective lending rates.

You should consider refinancing if you can benefit from these advantages:

Reduce your home loan interest

A remortgage is a great way to reduce the monthly instalment on your home loan should you get a better interest rate offered by the banks.

Example: Say your home loan has a fixed interest rate of 6.6% p.a., and the current refinance interest rate is 4.4%; you’ll be paying 2.2% less interest every year for the rest of your loan period if you go with refinancing.

To put things into perspective, 2.2% of RM400,000 (i.e. value of a mid-range condo unit in Cheras) is a staggering RM8,800!

Change your loan repayment period to your benefit

Remortgaging enables you to alter your loan period depending on your existing needs.

If you are refinancing to reduce your loan period to finish paying it off faster, it’s a good move to make if you are in a financially more stable position now than when you took on the loan.

However, refinancing also comes in very handy especially when you have a sudden increase in commitment, such as paying for a child entering tertiary education or when you need cash to prepare for potential cash flow problems ahead.

Change from Fixed Rate to Variable Rate and vice versa

If you are currently stuck on a home loan package without the payment options you need, refinancing could be the answer.

Depending on the type of package you chose, your home loan may feature a fixed interest rate (where the interest is fixed for the loan’s entire term regardless of market conditions) or a variable interest rate (where the interest rate goes up or down along with market rate). Fixed rate gives you peace of mind throughout the loan period due to its predictable nature; whilst variable rate allows you to pay less for your home loan given the right market conditions. With home loan refinancing, you’ll be able to switch from one to another to suit your current financial strategies.

Consolidate your debts

If you too are repaying several differing home loans all at the same time, a once-off refinancing plan might allow you to consolidate everything into one single account, so you’ll only be getting one statement and making one payment every month. To some: the convenience alone is worth considering the option.

When NOT to consider refinancing?

At first glance, there doesn’t seem to be any downside to refinancing but if you jump headfirst into it without understanding the risks and your financial standings, you might end up with more problems ahead.

Refinancing might not be the best option if:

Refinancing costs more that the savings you make

There are fees involved in refinancing home loans and those fees can rack up especially if you moving to a new financial institution which needs to do a whole new set of assessment and processing which all costs money.

It usually takes several years or more to make back these moving costs and start benefiting from refinancing. If you are not in a strong financial position to hold on to the property until you recoup these costs, then you shouldn’t consider refinancing at the moment.

You have existing financial problems

If you have missed other loan repayments recently due to financial problems and your credit score is lower than before you applied for the loan, you might be worse off if you try to refinance your loan.

The bank may impose stricter lending conditions if your credit score is weak and you may end up with loan terms that are even less favourable than what you already have.

You are already highly mortgaged

If you allow borrow more than 90% of your property value, there may be very little savings you can make by refinancing as you will be unlikely to get a better mortgage rate.

Using the cash-out on personal spending

The purpose of refinancing is to increase your financial stability. If you’re going to use the refinanced cash-out to go on a shopping spree or travelling, instead of clearing debts, you might end up with more financial problems down the line.

How to prepare for a home loan refinancing?

Just like buying a house, getting your home loan refinanced requires a lot of work and can be quite a costly move. So, you need to go through all the details carefully and figure out if this move is really for you.

If you need a quick refresher, here are a few things you need to keep in mind for home loan refinancing: