Today, people with existing mortgage exposure, look at re-mortgage as a great opportunity to reduce the mortgage cost, to unlock the property equity or to consolidate the debts. Well, the question comes, is it a smart move for every homeowner, and how refinance or re-mortgage can contribute to lower debt cost?

Indeed, with the reduced interest rates and competitive terms, potential mortgagors and homeowners are considering re-mortgage as a great way to save money and to lower the home financing cost, either by restructuring the prevailing home loan terms or by moving it to other lenders. Perhaps there could be any rationales for homeowners to consider refinance, however, it is prudent to determine whether the reason for refinancing reach out to the required advantages. Expert guidance could be an added value to your experience.

Mortgage Refinancing

Refinancing a mortgage is a process that helps unlock the hidden value of a property. A new mortgage may offer a lower rate of interest, lower monthly payments, and may release equity for large purchases. Refinancing can help borrowers consolidate or pay off existing debts. It can also provide a new opportunity to either lock in a low fixed rate of interest or choose a variable rate of interest to ease the household’s financial burden.

When Refinancing Makes Sense

Current market conditions and available mortgage rates favour refinancing, but how does a borrower determine if remortgaging will help save money.

There are two types of refinancing loans: rate and term refinancing, and cash-out refinancing.

Rate/Term Refinancing

Rate/term refinancing is the simplest and most straightforward form. The borrower trades in the current mortgage loan for better rates and terms, thereby cutting monthly mortgage repayments. The same property is kept as collateral.

Normally, a borrower will consider rate and term refinancing if his or her existing mortgage is an adjustable-rate mortgage and he or she wants to lock in lower interest payments. He or she may also consider rate and term refinancing if a fixed rate mortgage is due to expire. Another trigger is if mortgage rates have fallen significantly since the mortgage was initially taken out. Mainly, rate and term refinancing is driven if there is a considerable drop in the mortgage interest rates.

Cash-Out Refinancing

Cash-out refinancing is a way for homeowners to use the equity in their property to make an additional purchase or to take out a larger mortgage.

This type of mortgage loan is essentially for those who have been in their property for a while and have built up some equity which is available for them to access. primarily depends on the property appraisal value, as cash-out refinancing is mostly driven by the growing value of the property.

Refinancing Costs

Mortgage refinancing comes with a cost. However, over the longer term, it can generate substantial savings that more than offset any initial extra cost.

Currently in Dubai, under regulated mortgage guidelines and prevailing mortgage interest rates, the refinancing cost is less than 2 percent of the existing loan principal amount. This consists of Dubai Land Department charges, title deed fee, property evaluation fee, bank charges and insurance costs.

At present, banks are being more flexible about cutting exit/transfer charges. This reduces the transaction costs. They are also offering attractive rates and terms when switching from one bank to another.

How to Keep Refinancing Costs Low

First, make sure to do the maths and calculate whether the savings on the mortgage will offset the refinancing costs. A lowering upfront transaction cost means homeowners will benefit from the reduce rate faster. To decide on the best and lowest cost mortgage refinancing deal available in the market, be sure to analyze the various deals on offer, look for promotions and extra rewards, and on top of everything calculate cost or the refinancing fee.

The Refinancing Process

The process of refinancing is simple and to start the procedure, banks need homeowner’s personal bank statements, identification documents and liability details, along with the additional income documents.

Banks will review property documents comprise of title-deed copy, floor plan and if the property rented, then tenancy contract copy, rental payment details will also be reviewed and it will be considered as borrowers one of the income sources. The lender will review the current loan size, debt to income ratio, paid amount value and the left tenure of the existing loan together with the current property value to figure out the possible options. If all the documents are as per the bank guidelines, then the bank will be needing two to three weeks’ time to complete the procedure.

Bottom Line

Currently, financial institutions are offering up to 75 percent refinance product for expats and up to 80 percent for UAE nationals, at a very competitive interest rate on the property value. There are many benefits associated with the refinancing condition, but cautiously read the fine print and do proper homework to make an informed financial decision.

By Mr. Dhiren Gupta
Managing Director, 4C Mortgage Consultancy

As Published in Property Watch Magazine September 2016