Even 5-6 years ago, when applying for a mortgage loan, it was considered lucky to receive a mortgage rate of 11-12% per annum, and the rise in housing prices blocked part of the overpayments, which made it possible to consider the loan purchase a profitable investment. The fall in housing prices and lower lending rates has cast doubt on the project’s profitability. Having postponed the purchase for only a couple of years, the loan would be issued at 7-8% for a smaller amount, based on reduced market prices. But what about when the purchase has already been made and the borrower is forced to pay excessive interest rates? The proposal to refinance the debt seems to be the right way out of the situation, but is it really beneficial to reissue the debt on a new lender?
Refinancing programs are presented in each large bank in the form of repayment of 1 loan with the combination of several loan obligations, an increase in the repayment term and the limit of the allocated line. And yet, far from always refinancing is the right decision. As with any transaction, the refinancing program has its negative consequences, which instead of eliminating the problem only aggravate it.
Borrower’s main mistakes
It is difficult to resist the proposal to reduce the cost of interest overpayment, if the bank manager reports that the loan has been previously approved and it remains to sign a couple of papers. You should not make such decisions in a hurry – it will be reasonable to analyze each item of the proposed refinancing conditions. Sign a new contract with the lender can be with full confidence in the absence of errors when reissuing.
Refinancing does not guarantee that the rate will be lower than the current effective interest rate. If the difference in the rate does not exceed 2%, there is no point in talking about the benefits when switching to a new bank. Interest income is reset to account:
- the cost of re-registration of the loan;
- payment of fees, fines;
- additional payments accompanying the closing of the original loan.
Does it make sense to refuse the current creditor, if the new conditions are not economically viable?
New loan – new options and services
When signing a new loan agreement, carefully study the points specified in the agreement. The bank that refinanced the loan has the right to put forward additional conditions under which it is possible to provide favorable interest. Often this option is the purchase of personal insurance through a subsidiary of the same financial structure. If at the time the loan is processed, the manager reports the requirement to conclude a personal insurance contract, ask for more details about the insurance conditions and the cost of the policy.
Before agreeing to pay for the option, it is recommended to make a simple mathematical calculation – if the difference in the total amount of the loan overpayment is less than the cost of the insurance policy, the transaction loses its attractiveness.
New contract – new renewal costs
Mortgage borrowers, having found the refinancing program 2-3% lower than the current loan, will face the necessity of mandatory re-issuing a number of important securities, including appraisal of a loan apartment and renewal of the insurance contract. When comparing the current and future refinancing programs take into account:
- the cost of housing valuation, other collateral;
- Payment of new insurance of the collateral.
Of course, the legislation leaves a loophole in which money spent on insurance can be returned to the policyholder after refusing services during the first 5 days. However, the use of the “cooling period” threatens a spoiled relationship with a new lender who, after giving up insurance, has the right to revise the interest rate on the loan.
When to refinance late
And again, when calculating the final savings will require arithmetic calculations. Most lending programs use the annuity payment system, in which the payment remains unchanged throughout the entire repayment period, however, the principal payments of the first half of the term are directed towards paying the bank interest when the loan body decreases slightly. The real benefit from refinancing is possible only in the first half of the loan repayment, and better – the first third of the entire term of the loan agreement.
If with the former creditor in the process of long-term cooperation certain rules of interaction have been developed, then when refinancing a need arises for a thorough assessment of the conditions, it is possible that the proposed contract contains tougher penalties for delaying the loan or charges a fee for servicing the card through which credit is credited score.
Low rate – tough conditions
Discussing the terms of the upcoming contract, the manager may at the last moment mention that the refinancing rate will be valid only if certain bank requirements are met. For example, such conditions include immediate repayment of the previous loan and receipt of certificates confirming the closing. Upon submission of the confirming certificate, a period of up to 30-45 days is given, the period for issuing such a certificate in Sberbank is 30 days, Binbank requires a 45-day period. It is easy to calculate that in the event of an unforeseen situation, the borrower risks not having time to obtain the necessary documents about the absence of financial claims and the closure of loan accounts.
Loss of trust in the former bank
Trust relationships with the bank are built over the years of successful lending and use of deposit programs. When a client announces an intention to return the loan funds ahead of time, this news is clearly perceived as a negative factor depriving the bank of the planned profit. When a borrower a year later re-apply to the credit structure, you should not be surprised at the refusal to cooperate. One early repayment can cancel a long-term partnership with a bank. It’s a mistake not to take a chance to try to reissue a loan in the same bank, citing compelling reasons for deteriorating solvency or providing information about the readiness of another lender to give better conditions for refinancing. Even in case of refusal, you will know that you honestly tried to keep the partnership, using all the methods.
Disregard early repayment clause
If you are going to refinance the “inconvenient” loan ahead of schedule, you should be ready to undergo a lengthy procedure with additional costs. To compensate for lost interest income, many banks, not having the right to prohibit early repayment, put forward a number of conditions for repayment, including fines for violation of the payment schedule. Similar measures are waiting for the borrower and the transition to service to another lender. If the client plans to return the money ahead of time, then possible penalties should be taken into account when calculating the economic benefit.
Increase limit when refinancing
Refinancing programs often allow you to consolidate debts on several loans, offering to use 1 loan as the principal to maturity, and on the rest – highlighting the increased limit, which the borrower will spend at his own discretion. The temptation to use “easy money” to meet other needs is great, but one should not forget that an increased credit limit entails an increase in liabilities, and therefore increases the financial burden of payments. The correct solution would be to use for refinancing the amount that would be sufficient for settlements with previous creditors, and only then you can consider the possibility of new lending.
Inaccurate debt information
When agreeing on the amount that must be transferred to repay the current loan, it is impossible to avoid problems with the correct calculation of the debt to the bank. Clarifying the debt at the time of transfer of funds, it should be noted that the money will be credited to the credit account after some time. If funds are received by the bank a day later, the interest for the previous period will be calculated. Since the bank does not disclose the exact amount of the debt on a specific repayment date in advance, there is a risk that after the transfer the borrower will have to pay additional funds to close the loan. The error will not take into account the interest that has run over the period until the transfer from one bank enters the credit account of another lender.
When the choice is right
If the interest rate on the loan agreement has seriously exceeded the current rates, refinancing will help to bring the imbalance into conformity. The main thing in calculating the savings to consider the costs associated with the re-registration: surcharges, fines.
Answering the question of which bank is better to refinance a mortgage, you should carefully consider all the options available. The first thing to do before replacing a lender is to try to negotiate new conditions in the current financial institution. Keeping the successful cooperation experience, both parties remain satisfied:
- the bank retains interest on the loan;
- the borrower confirms his loyalty and commitment to one credit institution, passing to the rank of regular reliable customers.
Taking into account the negative experience of mistakes accumulated during the term of the refinancing programs, it is possible to draw conclusions about the expediency of the loan if several debts are collected in different banks that have been received recently, and the upcoming transaction does not entail expenses that exceed the savings on overpayment.