When buying a home, a mortgage loan is often required. However, after 2-3 years, the interest rates on loans tend to decrease and borrowers often try to find ways to improve the terms of the mortgage loan already taken out.
What is refinancing?
“Refinancing a loan” means taking out a new loan instead of the old one. The aim is usually to get better terms on the new loan so that it is more advantageous than the previous one. For consumer loans, the procedure is relatively simple and does not take long. This rule also applies to the credits you withdraw when paying for various appliances. For example, you can combine your payments for two appliances, such as an electric stove and a smartphone. You must refinance the Loan to avoid no interest rates or monthly fees on both appliances! Refinancing a mortgage loan is a more specific process that takes longer, but offers the potential for reduced monthly payments and modified terms, such as a due date for the full amount.
What is a mortgage refinance?
When we talk about refinancing a mortgage loan, we mean that the borrower is applying for an entirely new loan with another bank. This means going through the same steps again, plus some additional steps. It starts with an analysis of the borrower’s income and the preparation of an up-to-date market valuation of the property. A legal opinion is then taken on the security and a new mortgage is established on the home. Finally, the old mortgage from the first bank is repaid with the newly granted funds and then cancelled. This process takes more time as it requires documents about the mortgaged property and the borrowers themselves.
What refinancing a mortgage loan can achieve
Bank mortgage refinance terms are almost always more favorable than new mortgages, as lenders want to encourage responsible borrowers who have been consistent in their payments over the years. We have various options to consider when choosing how to improve the terms of our loan:
1. The aim is to reduce the amount of each instalment paid and to shorten the term of the loan. This way we will repay the loan faster and pay less interest.
2. The main objective of this plan is to reduce monthly payments by shortening the loan term. There are many reasons why people may want to refinance their homes, such as saving money or needing help paying off a loan.
3. To increase your loan payments and shorten the repayment period. Before choosing this option, consider whether your household income will increase and whether this extra money can go towards paying off the loan.
4. To acquire additional funds. We can ask for an additional amount when refinancing a mortgage and paying off the old debt. A personal loan can help us cover the cost of repairs, a new car, paying off another loan with a higher interest rate or any other expense. Under our new mortgage terms, we can be flexible on the number of monthly repayments and the term of the loan.
5. You can choose to refinance your loan with a 3- or 5-year initial interest rate lock-in period to make sure your repayments won’t rise even if global interest rates rise.
What to look for when refinancing a mortgage loan
Although the list of essential factors to consider is long, we need to evaluate each of them carefully to make the best possible decision.
1. Interest rate – The interest rate is the main cost of the loan, so it makes sense to focus on it. However, the overall increase in price will be more significant than the interest rate itself because there are other costs associated with taking out a loan.
2. Accrual of interest. Most banks in Bulgaria offer a variable interest rate with a short interest fixing period (usually 1, 3 or 5 years), after which you switch to a floating rate. With a floating rate, the rate at which the principal of the loan has accrued consists of two components: a reference rate and a fixed premium. The way in which each bank calculates its PLR is published on that bank’s website. In this process, indicators are used that the BNB or the NSI announce, or public market indices such as Euribor, OLP and others. Can be based on just one indicator or a combination of several. Analysing the components used to calculate the RLP can give an idea of how likely it is to change in the future. The terms of a rate change are almost as important as what the rate is.
3. Costs and fees associated with the loan. When you refinance your mortgage, you have to go through the entire loan process again. Therefore, most of the original costs will be valid again. These costs include:
● Market valuation
● Risk assessment fee
Banks often waive the market appraisal fee and/or the risk appraisal fee when refinancing.
● Costs associated with property and borrower documents.
The seller procures the documents to purchase the property. However, upon refinancing the loan for that property, those original documents become the borrower’s obligation – as the owner of the property in question. The costs involved therefore depend on the number of properties owned and the time taken to issue each document and can cost from BGN 80 to BGN 200-300.
● Property insurance.
Property insurance of the mortgaged property is mandatory. It is made at its market value or depends on the remaining principal. In addition, some banks take out insurance on the mortgaged property for their own account as a standard or promotional offer for refinancing loans from other banks.
● Life insurance – Although not usually required, this insurance policy protects the debtor by financially covering serious risks in the future that threaten his life and health. Prices for different types of cover – such as loss of life due to accident and illness, permanent or temporary disability, unemployment – vary depending on the level of protection.
● Registration fee and other notary costs associated with the new mortgage.
The cost of establishing a new mortgage is a significant expense when refinancing a mortgage loan. Their amount depends on the size of the loan. For example, for a loan of 100 000 BGN the fees are about 1%, and for a loan of 150 000 BGN. – about 0.8%. As the loan amount increases, these fixed costs decrease as a percentage of total costs.
● Letter of commitment (bank reference)
The servicing bank is responsible for drafting the commitment letter, which outlines the details of the loan balance, the account number to which repayment funds are to be transferred, and the timeframe in which the mortgage will be satisfied. The fee charged for this service usually varies by bank.
● Fees and costs for cancellation of the old mortgage.
Once you repay your old loan, the mortgage in favour of the first bank is cancelled. Most banks charge a fee of BGN 50-100 for the preparation of a mortgage cancellation application. This application is subject to entry in the property register at the registry office, for which additional fees are payable according to the original loan amount. For example, for a loan of 100 000 BGN the price is approximately 190 BGN and for a loan of 150 000 BGN – 230 BGN.
When is refinancing a mortgage loan not worth it?
Refinancing your mortgage to save money is most effective when you can handle the immediate costs. As you should know, refinancing comes with several significant costs: a fee for paying off your current mortgage loan early, fees for refinancing your mortgage loan with a new bank, and various additional costs associated with the entire process. Depending on the size of your loan, refinancing can actually cost you 1000-2000 BGN. In some cases, this can lead not to savings but to increased costs. Given how important this is, you need to carefully consider the amount you are going to spend and whether it is worth it. It would be rational to seek a financial advisor to look at the terms and help with the calculations.
When refinancing a mortgage is it worth it?
By refinancing your mortgage, you could potentially save thousands of leva in the long run. Even if refinancing initially costs you £2,000, you’ll probably get back four or five times that money in savings.If, for example, your mortgage has a 5% interest rate, you refinance it with another bank offering 3%. Although
you can initially lose £2,000 by refinancing your home loan, your monthly payment will drop by £100. After approximately two years you will make positive progress and save money every month. With thoughtful financial planning, you could save up to £10,000 over the life of your mortgage. It’s becoming clear that savings occur 2-3 years after refinancing, so you need to carefully consider whether you’re willing to wait that long and whether it makes sense.
If you are considering refinancing your mortgage loan, it may be more beneficial to renegotiate the terms with your current bank. This can save you money in some cases. Talk to a credit counselor before making any decisions. They will help you decide if refinancing is the right choice for you, depending on current market conditions and your expectations.
Currently, many banks offer to cover part of the initial costs for new customers in order to attract them. These costs can include mortgage origination fees, bank fees, market appraisal fees, property insurance, and more. The loan consultant will have detailed knowledge of all the current offers from different banks and will guide you through the process quickly and easily.