WORDS: DEBBIE HATHWAY :: IMAGES: SUPPLIED
Refinancing a home is often seen as a last resort, but this option has advantages and drawbacks. The Only Realty Group sheds some light on the subject
While traditionally viewed as a final option, home refinancing has come into focus for numerous individuals due to recent interest rate hikes and the increasing expenses of daily life. This has prompted many consumers to actively seek avenues for much-needed financial respite.
Refinancing your home is one way to do it. All it entails is applying for a new bond on your property based on its current value rather than what it was when you bought it. That way, you gain access to equity, the difference between the amount owed on a home loan and the property’s actual value. But how big a risk is it? Grant Smee, MD of Only Realty Group, says there are various misconceptions surrounding the refinancing of a home, some of which have very little truth to them. One of the biggest misconceptions is that refinancing will make it harder to sell a home in the future.
Megan Ladbrook
It’s important to note that selling a refinanced home will not affect the sale or the property’s value. Adds Megan Ladbrook, GM for Only Realty, “Homeowners refinance their homes for several reasons. They could be motivated to negotiate a new term or interest rate on a loan to free up cash to cover renovations that will increase the property’s long-term value. Today, some homeowners are opting to refinance their home to pay off debt.”
Costs of refinancing a home
Applying for refinancing doesn’t guarantee success, though, and you should know that submitting that application will prompt the reassessment of your credit score. “In addition, you will have to pay the same bond registration fees that you paid when you first purchased your home – the cost of bond registration, a bank initiation fee, deeds office fees and post, petties, FICA and other fees,” says Smee.
That can run into the tens of thousands, and you may only break even or make a profit on refinancing if the value of your home has grown substantially in the intervening years. Unfortunately, this is a likely outcome given that the national House Price Inflation (HPI) has slowed significantly in recent years.
Salaries are better than expected
The slow HPI trend may be good news for those considering refinancing as a property investment strategy. Recent statistics from ooba Home Loans and StatsSA reveal that national average monthly earnings have risen by 22.6% between Q1’19 and Q1’23, which is 6.5% higher than the average purchase price of homes sold during that period. What does that mean? “Salary growth is outpacing the price of houses – ensuring that there are bargains to be had for those with cash to spare. Homeowners who have received a large amount of cash equity after refinancing have the option to reinvest in a new buy-to-let property that will generate income. Once the property has had a few years to increase in value, they can repeat the same refinancing process and grow their real estate portfolio,” says Smee.
Pros and cons of refinancing
Ladbrook shares some insights into the pros and cons of refinancing. The pros include the possibility of a lower interest rate, the potential to invest the money in home improvements and debt consolidation. “If you have an excellent credit score, refinancing your bond gives you the ability to renegotiate a more attractive rate from their bank,” she says. “Homeowners can use the cash equity they receive to invest in upgrades such as solar power installations, increasing the value of the home should they choose to sell or refinance again in the future. What’s more, refinancing can provide an opportunity for homeowners to consolidate high-interest debt into one low-interest bond payment.”
Among the cons is the lengthy and costly process. “If your home has not significantly increased in value, the cost and time spent on refinancing may not be worth the effort. Refinancing and cashing out your equity means that you are essentially borrowing against it and thereby reducing its value,” says Ladbrook.
In addition, if your credit score has dipped since your initial home loan was granted, your new bond may be given on even less favourable terms.
Overall, deciding whether refinancing is right for you depends on your specific financial situation and goals. It’s essential to carefully weigh the potential advantages and disadvantages before starting the paperwork.
