5 things to know before refinancing your home loan

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Refinancing a home loan can be a great way to improve your overall financial health. (Pexels pic)

As optimism and consumer confidence increases with the rollout of the vaccine, industry experts are predicting a swift recovery for the property market, in line with previous market downturn trends.

Prior crises have demonstrated a trend whereby Malaysians tend to flood the market in the year following a particular crisis.

If this trend continues this year, it means that the lower prices of property are not expected to remain as such much longer. It’s high time to capitalise on them while you still can.

The good news is, if you owned a property before the pandemic struck, you may have built up equity which you can now cash out through refinancing and reinvesting in more property or by renovating your existing home.

It’s the perfect solution for those who didn’t plan ahead for buying investment property yet want to take advantage of current market conditions.

However, before getting too excited about this concept, here are some things you should know:

1. Assess your financial status

As with any other major financial commitment, the very first thing you need to do is calculate your Debt-to-Income Ratio to understand your financial status. Can you really afford to take on more debt?

Needless to say, your credit score also plays a major role, so check your CTOS and CCRIS reports regularly to keep them at healthy levels.

2. Understand the process and costs of refinancing

Refinancing comes with associated costs like legal fees, processing fees and stamp duty. The whole cost of switching to the new loan will cost you about 3%-6% of your total loan amount.

Some banks offer “no-cost” refinancing where you have to pay a slightly higher interest to compensate for the refinancing cost.

Other loan packages allow you to roll the cost to your new loan, adjusting your balance accordingly.

Pick a refinancing package that has the least cost of refinancing and has no hidden or extra cost, so that refinancing does not become an expensive alternative.

3. Analyse interest rates and lending rates

While a lower interest rate is the key to save up on refinancing, you must also look at the duration of the payment.

Some do not mind maintaining a loan for thirty or more years, while others prefer a shorter loan term.

Choose a duration that allows you to comfortably pay your loan instalment. Then look for the lowest interest rate within that duration to make the refinancing terms feasible for you.

Before refinancing your home loan, find out if the value of your property has appreciated, remained stagnant or plummeted. (Rawpixel pic)

4. Assess the current value of your home

Although properties are known to be a steady stream of capital appreciation, the property industry has been volatile in the aftermath of the pandemic.

Certain areas have recorded stagnant prices while others have seen the value plummeting. Before refinancing, you need to know which category your property falls into.

In order to cash out, you can either cash out equity or repayment over the years i.e. the remaining balance of your loan versus the current value of your property. This can be done by checking against recent transaction data.

When it comes to refinancing, banks would prefer houses with larger equity. Talk to different banks about their packages.

See if they offer favourable terms and conditions for your home. That way, you would be in a better position to negotiate a good refinancing deal with the bank.

5. Seek additional perks

Some banks offer lower interest rates while others have lower processing fees. Other factors to look at are flexible home financing features, time periods, loan limits, and other conditions and requirements.

There are other small factors that go a long way like easy application or even the ability to withdraw extra payments that you have previously made.

Refinancing may be a great way to increase your cash flow, however, it all depends on your intentions.

Try to use your cash for something that can generate returns such as renovations to rebuild the equity you have taken out. Remember, you are essentially taking on more debt when you refinance.

Whip out your calculator and do the maths to make sure refinancing is really the best course of action to suit your financial needs.

Unlocking your home equity is not a decision you should make lightly but if you do it right, it can be a strategic way to improve your overall financial health.

This article was written by Adlene Hanna of PropertyAdvisor.my, Malaysia’s most comprehensive source of property data, property analytics and insights.