Refinancing is a term that gets thrown around a lot when it comes to home loan. Some people do it to strategically reduce the interests they pay for their homes; whilst others do it to free up more cash for their monthly usages.
If you’re actively looking to make changes to your home loan in order to suit your current financial requirements, read on to find out more about home loan refinancing.
What is Home Loan Refinancing?
Home loan refinancing refers to the act of replacing an existing home loan with a new loan under differing terms and conditions. In layman’s term, think of it as borrowing money again to pay off the debt you owe in your current home loan account.
Advantages of Refinancing Your Home Loan
Reduce Your Home Loan Interest
Taking advantage of changes in Base Lending Rate (which influences home loan interest rate), refinancing is a great way to reduce the monthly instalment on your home loan should you apply for it when BLR is dipping or when a better interest rate is offered by the banks.
Example: say your home loan has a fixed interest rate of 6.6% p.a., and the current interest rate for home loan refinancing is 4.4%; you’ll be paying 2.2% less interest every year for the rest of your loan period if you go with refinancing.
To put things into perspective, 2.2% of RM400,000 (i.e. value of a mid-range condo unit in Cheras) is a staggering RM8,800!
Extend Your Loan Period
Home loan refinancing enables you to alter your loan period depending on your existing needs. If you have monthly cash flow issues, taking up a refinancing plan with a longer loan period allows you to pay less in monthly instalment, hence freeing up a greater part of your monthly income for personal use. This comes in very handy especially when you have a sudden increase in commitment, such as buying a new car or paying for a child entering tertiary education.
Shorten Your Loan Period
As a continuation from the previous point, say you are now more financially stable compared to when you first took your home loan, and you’re thinking about reducing your loan period (eg. from 30 years to 10 years) in order to save on your interest cost; home loan refinancing is a viable option for you to do that, especially if you’re currently stuck on home loan package without flexible prepayment options.
Change from Fixed Rate to Variable Rate and Vice Versa
Depending on the type of package you chose, your home loan may feature a fixed interest rate (where the interest is fixed for the loan’s entire term regardless of market conditions) or a variable interest rate (where the interest rate goes up or down along with market rate). Fixed rate gives you peace of mind throughout the loan period due to its predictable nature; whilst variable rate allows you to pay less for your home loan given the right market conditions. With home loan refinancing, you’ll be able to switch from one to another to suit your current financial strategies.
Consolidate Your Debts
Owners of multiple properties would attest it’s a real hassle to keep up with each and every one of your home loan accounts. If you too are repaying several differing home loans all at the same time, a once-off refinancing plan might allow you to consolidate everything into one single account, so you’ll only be getting one statement and making one payment every month. To some: the convenience alone is worth getting a refinancing plan for.
