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.
In a case where you wish to refinance your home, Grant Smee, managing director of Only Realty Group, explains that 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.
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“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.”
Refinancing your home, he says, 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.
“However, in the current economic climate, some homeowners are actually opting to refinance their home in order to pay off debt,”
What it costs
Smee warns though, that refinancing doesn’t necessarily guarantee a big pay day, 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.
“Unfortunately, this is a likely outcome given that the national House Price Inflation (HPI) has slowed significantly in recent years.”
Pros and cons of refinancing
Smee shares a list of the key positives and negatives:
PROS
1. 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.
2. 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.
3. Debt consolidation
Refinancing can provide an opportunity for homeowners to consolidate high-interest debt into one low-interest bond payment.
CONS
1. 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.
2. 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.
3. 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.
Make sure you can survive interest rate increases
Affordability is always a determining factor when it comes to looking for a home and applying for a bond, irrespective of the current interest rate, says Carl Coetzee, chief executive of BetterBond. You should always ensure you will be able to afford the monthly loan payments over the repayment period.
To assist with this, BetterBond, as well as most banks and home loan providers, offer an online affordability calculator that provides an indication of what you can afford, taking into consideration monthly expenses and income.
“Make sure your credit score is in good shape when you're considering buying a home, as this will improve your chance of securing the lowest interest rate possible,” he adds.
You should also make sure you have enough cash to cover the bond and transfer fees when buying a home, and put down as much of a cash deposit as you can.
Adrian Goslett, chief executive of Re/Max of Southern Africa, says homeowners and new buyers must ensure there is provision within their budgets to allow for an increase of at least 0.25% ahead of any interest rate announcement. These announcements take place every second month.
“Interest rates tend to go up gradually by around 0.25% or 0.5% at any given announcement, so budgeting for this ahead of time will be in your best interests.”
Staying the course
Currently, homeowners may have to hold out a little longer for a reprieve from increasing monthly bond repayments, as at least one more interest rate hike could be on the cards, Coetzee says.
“However, there are signs that an increase on Thursday could be the last of the current rate-hiking cycle, and along with our industry partners, we are hopeful of seeing see the repo come down over the remainder of this year, and into 2024,” says.
Current homeowners and aspirant homebuyers, he says, would do well to remember that property is a long-term game. Staying the course through periods of rising interest rates will give homeowners an edge when rates start to come down again, as they invariably do.
Furthermore, there are already signs of a pick-up in the residential property market, with Lightstone reporting a slight increase in national year-on-year house price inflation, now at 2.64%, for the first time since 2021.
“The strong possibility that interest rates are likely to drop during the second half of this year promises welcome financial relief for homeowners.”
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