A mortgage is a long-term commitment, so we make the decision with caution. We scrupulously review the offers, seek advice to choose the best one. However, even the greatest prudence will not save us from the fact that after a few years there will be more favorable ones. You can say that there is nothing to cry over spilled milk. But you can also think about whether it is really spilled?
Situations in which it turns out that a mortgage taken some time ago is not as attractive to us as it seemed at first, are not at all rare. The reasons are different – our financial capabilities may have changed along the way – both for better and for worse, or we just came across an offer on much more favorable terms. The refinancing loan option may then be the right thing to do.
What is a refinanced loan?
Simply put – it is a transfer of credit to another bank. This repays our debt to the old one (because it does it quickly, it does not bear such great costs associated with the interest rate that we would have incurred all these years) and presents a completely new, often much more favorable plan. In theory, this sounds like the perfect solution – nothing but arrange a meeting with a representative of the selected bank and sign the contract, but how is it in reality?
Of course, as it happens in the world of finance, this is a very complex matter. Sometimes it is actually a good thing, but it may happen that we leave the whole operation like Zabłocki on soap. Therefore, it is worth considering when refinancing a mortgage pays off and when it does not, and what potential risks it may bring?
When considering refinancing your mortgage, be careful …
Interest, interest and interest
Refinancing a loan is certainly not a good option for people who have had 4, 5, 6 or more years of repayments behind them. Why? For most mortgage loans, in the initial period we mainly pay interest – the bank earns us, while the actual debt is practically unchanged. By deciding to transfer, we will simply earn another bank, and we will bear even more costs than we had originally.
The amount of margins and hidden costs
Something that we should pay attention to before refinancing is the amount of margins that affect the interest rate on the loan. In 2009 they amounted to over 3% on average, while in 2013 they were about twice as low. So if we decided to take out a loan in 2009, we could save a lot on the change. In the case of a 30-year loan for 210,000 zlotys – even around 200 PLN per month. Of course, we take into account optimally favorable conditions – that is – a high margin in 2009 and currently below 1.5%. Similarly – the smaller the difference between margins, the smaller the potential profits. And with a relatively small difference, after adding hidden costs, it may turn out that with a new loan, monthly fees will increase even more. What can they be related to?
First of all, our current bank hoped that in the long term it would earn us – early repayment is not in his interest. Depending on the type of contract, in exchange for releasing us, he may charge a commission for this, which is a minimum of 1-2 percent of the total amount. However, it happens that banks after 3 years completely give it up – it is worth getting interested in this issue, because it can significantly increase or decrease the benefits associated with refinancing.
Commission for a new bank
There are a few more fees that we have to take into account. They are associated with, among others with a commission for a new bank, an obligation to set up a new account, insurance for a flat or re-valuation. If you took a loan denominated in a foreign currency, it is worth looking at the currency spread (this is the difference between the buy and sell rates) that our potential new bank offers. As these institutions decide the amount of the spread, it can be both 5% and 15%. Its impact on the costs we incur is therefore significant. Paying attention to this aspect and choosing the optimal offer in this respect may mean annual savings of up to several thousand zlotys.
Refinancing also means extending the repayment period
With refinanced loans, banks often offer us an extension of the repayment period, which translates into a reduction of the monthly installment. It is also connected with the fact that ultimately we will bear the greater cost of the loan than originally. At the time when our existing fees related to credit were too burdensome, such a solution may still be attractive.
Mortgage refinancing – when is it profitable then? There is no clear and clear answer to this – each case should be considered individually. If you approach the topic carefully and reliably apply many factors to the analysis, it can be a way to quite serious savings.