After years of regular repayment of the loan, it turns out that the terms of our commitment differ significantly from the current market proposals. We ask ourselves – what is the point of overpaying for a loan? Do we have any chance to improve the financing conditions? Along with the ongoing financial education of the society, interest in refinancing loans is increasing.
A refinancing loan is, in the simplest terms, a conversion of an obligation incurred in one bank for an obligation given by a second bank. Refinancing may cover different types of loans, ie a mortgage loan, a cash loan or a credit card account, but this procedure usually applies to long-term loans. It is only in the long term that we can confirm market changes that could significantly affect the parameters of the loan.
At the same time, our life situation, directly determining the ability to service debt, does not change significantly from day to day. When we start earning better or have received an unexpected cash injection, we may consider shortening the funding period. It is true that the loan installment will be higher, but in return we will soon become the owner of the property purchased for a loan. When our income is lower, the way to lower the installment is to extend the funding period.
An attractive margin is not everything – summarize and compare all fees
Most often, customers decide to change the lender due to the unattractive level of interest on the loan. Keeping in mind that we will pay off the liability for many years, even a slight reduction in the amount of the installment will result in significant savings over a broad time horizon. The loan interest rate consists of two elements. For liabilities incurred in zlotys, this is a variable rate in the form of WIBOR rate and the bank’s margin determined individually, which makes the offer attractive.
The lender has no influence on the WIBOR rate, competing with the size of the margin. Banks setting its level are guided by such factors as creditworthiness, own contribution or the purposefulness of the loan. Looking for the most attractive offer, it is worth to evaluate this parameter first.
We assume that we have chosen an offer which is more favorable in terms of credit margin. In the next stage, let’s focus on the other costs associated with refinancing the loan, because they can ultimately decide on the profitability of the project. The amount of additional fees may be paradoxically higher than the potential benefits. Let’s check if our current borrower did not reserve in the contract the commission on early repayment of the loan. Usually this fee is charged in the first years of the loan and is usually from 2% to 3%.
Another possible burden is a commission for granting a loan to a new bank, a re-valuation of a property or a fee for another mortgage entry. Verify necessarily the period in which we are obliged to repay the loan, because the lower installment may result from the extension of the repayment period, which will pay more interest and the loan may turn out to be more expensive than the original solution. It is best to compare offers with the same repayment date.
Is it worth it at all?
Deciding on a thorough analysis of the current and future credit offer, it may turn out that refinancing is a viable solution. Remember that this is not a rule and it may turn out that after completing numerous formalities, we will replace your current loan with a solution that is more expensive. The period of incurring the original commitment is of great importance. In times of high interest rates, credit always costs more, so it is worth checking when interest rates are consistently lowered.
We should not forget that a competitive offer is an excellent contribution to the attempts to renegotiate conditions with our current lender. Eventually, the financing conditions may improve without the need to change the bank.