The benefits and pitfalls of refinancing your home

The benefits and pitfalls of refinancing your home

As the value of property increases, more and more people are refinancing to unlock the value in their home but few people realize how it really works, its true cost - or even that the option exists.

Saul Geffen, Managing Director of MortgageSA, South Africa's leading mortgage originator says, "Many people have a lot of equity sitting in their homes thanks to the strong price gains over the last few years and want to access that money in their property through refinancing, whether by way of a re-advance or by registering a second bond over their property. Homeowners who are bond-free can also refinance their properties to raise capital.

"In the past year alone the market for further advances and readvances has grown in excess of 20% and shows no signs of slowing down.

"We have experienced a surge of people applying to us for re-advances and second bonds to finance renovations, new cars and other capital expenditure.

"Using a refinancing facility is also a cheaper way to access finance than say obtaining a personal loan or financing a car through the traditional means. This is because home loan rates are typically the lowest of all financing methods. It can also be a convenient way to consolidate debt by converting short-term liabilities into long-term ones."

Geffen says that to refinance a home, the homeowner typically must apply for a readvance or second bond. During the application process, the home will be appraised to determine its value, and the homeowner's credit file will be reviewed. The lender will also order a title report on the property, to search for any other liens that appear. Assuming all these items meet with the lender's approval, the facility will be approved.

So for example, if you bought a property for R500 000 18 months ago, you may find that the value of the property has increased to say R1 000 000. As a homeowner, you could have access to this extra R500 000 equity in your home.

But Geffen warns that refinancing can be risky and that home-owners should consider the full costs.

Costs typically include second bond registration costs, conveyancing fees and the cost of valuing the property. For a R1 000 000 home loan, the all-inclusive cost would typically add up to R7 500. Although this equates to 0.75% of the loan amount, it still needs to be weighed against the long-term benefit of refinancing.

Geffen says however that customers must be able to afford the increased instalments from the increased loan and they need to be sensible about what they spend the extra money on. They should also be aware that the value of a home can also depreciate, and if a second bond is taken out this could lead to a situation of negative equity.

"This is why it is preferable to use the additional funds that have been accessed through refinancing for property improvements, and so further increase the property's value."

Geffen also notes that if the same property bought for R500 000 is now valued at R1m, an opportunity exists to negotiate a more favourable interest rate now that the loan-to-value ratio has fallen significantly.

"Quality originators offer free advice on the questions homeowners typically have about the costs associated with refinancing and can help clients to understand the personal financial planning implications of refinancing their homes."

"It's not only those who get a readvance that benefit from the increase in property values, but also those that take the trouble to renegotiate the rate that they are being charged on their existing home loan."

"We have negotiated more favourable rates for customers as their loan-to-value ratio improves - in most cases this is preferable to switching and incurring unnecessary costs and hassles."

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