The question of when and when not to refinance a mortgage can be a tricky one. There are several motivations to revise or replace a loan contract. One may be the opportunity to obtain a lower interest rate. Or perhaps you’ve got the option to shorten the loan term. It could be the desire to convert from fixed to adjustable rates, or vice versa, to tap a home’s equity to finance a large purchase. Or maybe it stems from a simple desire to consolidate debt.
It all depends on an individual’s personal situation, income level and financial planning. But in the current environment, one of the best reasons to refinance is to lower the interest or profit rate on an existing mortgage.
“Positively, for a prevailing mortgage, with all-time low-interest rates now it may be a good time to opt for refinancing,” says Dhiren Gupta, Managing Director of Dubai-based 4C Mortgage Consultancy. “Homeowners now have the potential to reduce the cost of their mortgages and gain financial flexibility in the long term. “There are many benefits associated with it, but, however, a homeowner also needs to look at the refinancing rationale wisely in order to make an informed move with the current market,” he adds.
The rule of thumb used to be that it was worth refinancing if the interest or profit rate on a mortgage could be reduced by at least 2 percentage points. Some lenders even say 1 per cent savings is enough of an incentive to refinance, but this depends on the closing costs of the old loan as well as other fees and charges. It also depends heavily on if a property’s value has appreciated over the financing period.
Many larger banks in the UAE are currently offering attractive refinance packages or at least cheap mortgages worth considering for refinancing. Best (reducing) interest or profit rates stand between a little lower than 3 per cent to a bit above 4 per cent per year, which can be a big deal for one who has an 8 per cent or more mortgage taken ten years ago to pay off.
“The mortgage market is currently experiencing probably the lowest finance rates in the last years,” says Preeti Bhambri, Managing Director of MoneyCamel.com. “Interest rate on home loans is hovering around 4 per cent per annum, down almost half from 2006 levels of 8 per cent.”
This is especially important given the possibility of a interest rate hike by the US Federal Reserve starting this December. “We would advise clients to go for fixed-rate options, which can leverage the implications of rising interest rates,” says Gupta, adding that “Borrowers who want to lock in a fixed-rate deal should remortgage sooner rather than later.”