Pros & Cons of Refinancing Your Property Loan

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So with the cap on interest rates, many are feeling the pinch of the high fixed-rates they are paying.  The good news is that, with these favorable conditions, perhaps it might be time to consider refinancing your mortgage.

Here are some of the benefits and drawbacks of making this decision:

Benefits

Cheaper Personal loans from low-interest rates and/or better credit rating

Before the interest rate cap, many Kenyans were paying mortgages of up to 22% (could be higher but that’s the highest I have seen, personally). The introduction of interest rate cap is one of the best reasons to consider refinancing your loan. With today’s rates, you can save yourself quite a lot of money over the life of your fixed-rate mortgage loan.

Putting cash in your pocket

The value of your asset most probably increased since, and refinancing allows you to cash-out on your property equity and use cash for more productive uses.

Merging Personal loans

Refinancing allows you to consolidate mortgages and personal loans. This can save you money by allowing you to pay one loan rate on the entire amount. A lot of banks can do this for you and will usually ask about your loan portfolio.

Drawbacks

Only a few of us can qualify

Lower interest rates means, lenders are more careful about who they lend money as they seek to reduce risk of default or extensions. As such, their selective nature means people with average credit scores may be rejected. This does not mean you should not try – learn your chances and move ahead as you deem fit.

Refinancing costs and prepayment penalties

The cost of refinancing can offset the intended savings you will get on a lower monthly payment under the new loan. Many banks have penalty fees for early loan repayment – for instance, a 5% penalty on early repayment amount. So look carefully at the refinancing costs to make sure your savings will pay back those costs in a reasonable timeframe.

Increased financial risk exposure

Refinancing could potentially expose you to more financial risk. For instance, if your initial loan is a “non-recourse” loan (meaning the bank can only look to the collateral as a means to repay a delinquent loan if the cash-flows from the property are insufficient), refinancing a mortgage may mean your loan is “recourse” – be careful about this. Research on this before you decide to refinance.

Paperwork, and more formalities

And finally, consider the amount of stress, paperwork, and formalities to get this done. You had initially suffered enough to get the initial mortgage, and now, even more, you will suffer to get this lower rate. The entire process is more onerous than ever. At the minimum, you will be required to complete another lengthy loan application that allows for complete review of your finances and history. Moreover, you will have to work harder to do all the necessary appraisals on the property, insurance and worse still sign off a blizzard of documents at settlement.


Please note that many experts think, refinancing may not be a great idea as your life situation has changed and the lenders will make a fresh evaluation of your suitability for a loan. The great thing is that they cannot revise your loan rate higher because of the interest rate cap. However, it is important to note these they will not only consider your financial situation and the property value – they will also take note your prospects, the age of the mortgage and credit score.

At the end of the day, refinancing at a good rate for a suitable term should ultimately improve your financial position – that is what we are gunning for.

Meanwhile, You can click on the following links to read more on debt management: 

 

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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