Refinancing a Mortgage

What refinancing is

Refinancing consists of taking out a new loan at another bank and using it to repay the existing commitment. As a result the mortgage is transferred to a new institution, usually on more favourable terms, such as a lower margin, a better interest rate or a different rate type.

The purpose of refinancing is most often to lower the monthly payment or reduce the total cost of the loan. It can also be a way to change the interest rate from variable to periodically fixed or vice versa, depending on preferences and market conditions.

When refinancing pays off

Refinancing makes the most sense when the difference between your current and the new terms is significant and you still have many years of repayment ahead of you. The longer the remaining period, the greater the scope for savings spread over time. It is worth considering when your credit capacity and history have improved since you took out the loan.

Refinancing can also be advantageous when clearly lower margins than the one written into your contract have appeared on the market. Because the margin is fixed and does not change during the loan, transferring to a bank with a lower margin may be the only way to lower it.

Costs and formalities

Refinancing is in practice taking out a new loan, so it involves a fresh assessment of credit capacity, gathering documents and costs tied to changing banks, for example concerning land and mortgage register entries and establishing new security. The new bank may also charge a commission.

That is why, before deciding, you should weigh the potential savings against the total cost of the transfer. Refinancing pays off when the saving on the payment and interest clearly exceeds the costs of the operation within a reasonable time horizon. The support of a mortgage adviser who will calculate the scenarios can be helpful.

How the process works

The process starts with comparing offers and choosing a bank with more favourable terms. You then submit an application, undergo a credit-capacity assessment and provide documents, including information about your existing loan. After a positive decision you sign a new contract, and the new bank repays the existing commitment and takes over the security.

The whole process resembles taking out a loan from scratch, so it is worth preparing for it and arming yourself with patience. It is also worth checking whether your current bank would charge compensation for early repayment, and comparing whether your existing bank might prepare an offer to retain you as a customer.

Summary: a way to a cheaper loan that has to be calculated

Refinancing a mortgage is an effective way to lower the payment and the total cost of the commitment, especially when the difference in terms is significant and many years of repayment remain. It is, however, taking out a new loan with all its formalities and costs. The decision is best based on a careful comparison of the savings with the costs of the operation and on an analysis of your own current credit capacity.