Finances are tight for a lot of people. The Covid-19 lockdown has left countless people with reduced salaries and unpaid leave, with many others facing the threat of layoffs. This has obviously forced people to tap into their savings and investments to get the cash they need to weather this Coronavirus storm.
Borrowers have been hit especially hard. Among borrowers, those with an active mortgage are scrambling to find ways to ease the pressure on their finances. Are you in the same boat too? After all, home finance is a huge commitment, and mortgage repayments can take up a big portion of your salary.
But besides the three-month penalty-free repayment holiday being offered by UAE banks, homeowners like yourself have one more option to access some serious financial relief during these uncertain times – Mortgage Refinance.
How can mortgage refinance come to your rescue?
Traditionally, mortgage refinance becomes popular when interest rates start falling. Refinancing an existing home loan allows you to replace your current loan with a new one that offers a lower interest rate.
As a homeowner, mortgage refinance would help you meet one of the following goals…
- Lowering your home loan installments
- Lowering your mortgage term
- Allowing you to tap into your equity in your home
This third benefit of mortgage refinance is already making the product soar in popularity around the world right now. While it’s a good idea to refinance your mortgage to take advantage of falling interest rates, you can also access the cash locked up in your home to prepare a buffer for financial emergencies.
Here’s an example of how it works
Let’s assume you have an existing home loan with Bank A. Here are the details of this loan:
- Outstanding loan principal is AED 1,000,000
- Remaining tenure is 20 years
- Interest rate is 4 percent per annum
- LTV (Loan-To-Value) is 65 percent of your current home value
- Monthly repayment is AED 6,000
Now, you decide to get some cash out of your home, since you have access to a higher finance amount. Central bank guidelines have also made banks lower the downpayment requirement, giving you the option to finance up to 80 percent of your home value.
So you opt for a new buy-out mortgage (or mortgage refinance) with Bank B, under the following terms.
- New loan principal is AED 1,200,000
- New tenure is 20 years
- New interest rate is 3.5 percent per annum
- LTV (Loan-To-Value) is 75 percent of your current home value
- Monthly repayment is AED 7,000
Now, after closing the mortgage with Bank A, you have an additional AED 200,000 in your bank account as a cash buffer. And thanks to the 0.5 percent lower interest rate, your EMI hasn’t gone up too much either (increasing by AED 1,000 per month).
Can this help you consolidate your loans? Yes!
Continuing with the above example, let’s assume, you also had a personal loan worth AED 150,000. You were repaying this loan in monthly installments of AED 3,500 at a rate of 5 percent per annum, for a standard 48-month tenure. So your overall loan repayments came to AED 9,500 per month.
Refinancing your mortgage also gives you the option of settling this personal loan with the new funds you have, and lowering your monthly debt commitments.
Sounds good? But there may be more than one catch
Mortgage refinance, especially at a time like now, may not turn out be the best option for everyone. Here’s why…
- The economic crisis could have driven the market value of your property downwards. So, a new home valuation by the bank may result in you having access to a lower finance amount, even at a higher LTV.
- You also have to account for early settlement fees at your existing bank, as well as processing fees and valuation fees at the new bank. This is an important step to remember when calculating the financial outcome of refinancing your mortgage.
- You will not be able to qualify for home refinance if you have lost your job during this crisis. Since mortgage refinance involves a bank providing you a fresh home loan by buying out your existing one, you will have to meet the eligibility criteria set by the new lender.
- Eventually, you are increasing your overall financial obligation. You now have a bigger loan to repay over the loan tenure.
Looking to switch your existing home loan for a new one? Compare and choose from dozens of mortgage products in the UAE.