Advantages and drawbacks of refinancing your home

Refinancing a home is seen as a last resort for many, but the recent succession of interest rate hikes and the rising cost of living has left many consumers in search of financial relief.
 
Here’s what you need to know about the process.
 
In a case where you wish to refinance your home, you’ll apply for a new bond on the same property based on its current value rather than its valuation at the time of purchase. By doing so, you gain access to equity: the difference between the amount owed on a home loan and the actual value of the property.
 
“There are various misconceptions surrounding the refinancing of a home, some of which have very little truth to them,” says Grant Smee, Managing Director of Only Realty Group. “One of the biggest misconceptions is that refinancing will make it harder to sell a home in the future.”
 
Smee argues that selling a refinanced home will have no bearing on the sale or the value of the property whatsoever.
 
“Homeowners refinance their homes for a variety of reasons. These include the ability to negotiate a new term or interest rate on a loan or to pay for renovations to increase the property’s long-term value,” says Smee. “However, in the current economic climate, some homeowners are actually opting to refinance their home in order to pay off debt,”
 
What refinancing a home costs
 
Smee warns that refinancing doesn’t necessarily guarantee a big payday, and that when doing so, your credit score will be reassessed.
 
“In addition, you will be required 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.”
 
“The total cost of bond registration can run into the tens of thousands, and you may not break even or make a profit on refinancing if the value of your home has not grown substantially in the intervening years,” he says. “Unfortunately, this is a likely outcome given that the national House Price Inflation (HPI) has slowed significantly in recent years.”
 
Despite the odds, many South Africans are still earning well
 
Luckily, the trend of slow HPI 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, while the average purchase price of homes in the same timeframe has risen by a mere 16.1%.
 
“This means that salary growth is outpacing the price of houses – ensuring that there are bargains to be had for those with cash to spare,” says Smee. “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,” he adds.
 
Pros and cons of refinancing
 
Smee shares a list of the key pros and cons:
 
Pros:
 
Possibility of a lower interest rate. “If you have an excellent credit score, refinancing your bond gives you the ability to renegotiate a more attractive rate from their bank.”
Invest it back into the home. “Homeowners can use the cash equity they receive to invest in home upgrades such as solar power installations, increasing the value of their home should they choose to sell or refinance again in the future.”
Debt consolidation. “Refinancing can provide an opportunity for homeowners to consolidate high-interest debt into one low-interest bond payment.”
 
Cons:
 
Long 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.”
Credit score assessment. “If your credit score has dipped since your initial home loan is granted, there is a chance that your new bond may be granted on even less favourable terms.”
Reduce the equity in your home. “Refinancing and cashing out your equity means that you are essentially borrowing against it, and thereby reducing its value.”
 
“Overall, deciding whether refinancing is the right option for you depends on your specific financial situation and goals. It’s important to carefully weigh the potential advantages and disadvantages before deciding,” Smee concludes.