Should you refinance your home?

Refinancing your home is one of the most effective ways to release cash, reduce monthly expenditure, and improve your financial position.

In this article, we explore the reasons you may consider refinancing your home - whether renovating, planning for your child’s education, or even consolidating debt.

We examine the benefits and pitfalls of refinancing, and we consider how you can go about it.

Tip: Debt consolidation can help you to combine many debts into one single, affordable loan. Find out more.

How does refinancing work?

Residential properties in South Africa have shown a trend toward increasing in value over time, says Rob Kelso, CEO of SA Home Loans. For this reason, if you’ve owned your home for some years, it’s likely worth more than when you purchased it. This is where refinancing can become a viable cash-securing option.

“When you refinance your home, you’re securing a new or additional mortgage for your property based on its current value, as opposed to the amount it was valued at when you took out your home loan,” Kelso explains.

“This can give you access to equity, which, when used wisely, can improve your standard of living or strengthen your financial standing.”

For example, if you owe R500,000 on your home loan, but your home is worth R800,000, the R300,000 difference is equity you could access through refinancing.

“Essentially, this is an additional line of credit extended by your lender, and you will pay interest on it. However, if you secure a lower interest rate, you can improve your financial position by consolidating your debt - or you can pay for big expenses such as home renovations or tuition fees,” he says.

A further loan or a readvance?

Home refinancing can be done via a readvance or a further advance or loan. It pays to know the difference so you can decide which best fits your budget.

“At the start of the year, we tend to see homeowners reborrowing all or part of the amount they have already paid off on their bond, to finance something else,” says Carl Coetzee, CEO of BetterBond.

“This is known as a readvance. However, it is not a good idea to ‘borrow’ money to clear your short-term debts in this way, as it will push up your monthly bond repayments. If you then can’t afford these, you’re putting your most important asset at risk.”

Coetzee says debt consolidation using a home as security should only be considered by extremely disciplined borrowers who have the means to pay back the equity they have extracted within a short period, so as not to pay excessive interest.

Homeowners can also consider taking out a new bond, but there are costs to consider, such as bond registration and valuation fees, and legal fees.

“If you don’t have the cash to cover these, you will pay interest on them over the life of the loan,” Coetzee says.

Use and repay the funds diligently

Wiehahn Koch, head of Purpose Lending at Capitec, says, “Refinancing should be used when the funds can be deployed for sound financial reasons, such as investments.”

“However, if you repay expensive debt with the proceeds of your refinanced home loan, make sure you continue to pay a similar instalment so you’re not paying interest on the refinanced portion over the full bond term.

If you plan to use the advance to consolidate your debt, Coetzee suggests that you take the total of what you were paying on your debt previously - or as much thereof as possible - and add it to your new bond repayment.

“In this way, you will reduce the capital balance of the loan and rebuild your equity,” he says. “You may even be able to pay off your bond faster than originally anticipated.”

Paying even R100 extra each month into a R1 million bond can trim seven months off a 20-year home loan term, he says, saving you around R41,253.

You should also establish the interest rate that you will be charged on your new bond beforehand, as this can make all the difference to the viability of your debt reduction plan.

“A bond originator can help you to get the best interest rate possible,” Coetzee says.

Tip: Do you need to insure your home? Get a home insurance quote here.