What exactly does re-financing your homeloan do?

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ant101

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I have been paying extra cash into my home loan account every month since I got it. I did an inquiry at my bank (who is not very helpful at the best of times) for my balance. On their reply they stated that I should re-finance my bond to make the monthly payments lower. (due to the fact of my extra payments)
I'm skeptical on taking their advice, because their might be unknown charges or commitments.
What exactly does re-financing your bond mean/do ?
 
The gotcha with this is that you have to pay all the fees again, on a bond of 645k this could be as much as 30 grand +
 
ant101 said:
I have been paying extra cash into my home loan account every month since I got it. I did an inquiry at my bank (who is not very helpful at the best of times) for my balance. On their reply they stated that I should re-finance my bond to make the monthly payments lower. (due to the fact of my extra payments)
I'm skeptical on taking their advice, because their might be unknown charges or commitments.
What exactly does re-financing your bond mean/do ?
Click to expand...

Advice as above + why would you want to make the the installments lower when you are already paying in more than the installments?
 
I'm not sure how it all works, but "re-financing" did seem to mean something like this [this is not necessarily the only meaning, but that's what people did]

You buy a house for R100k, with a loan of R100k paid off over 20 years.

Now your house generally becomes more valuable, so after 5 years say it's worth R150k.

Then some people fell into this trap and "re-financed" their loan to R150k .I'm not sure about the monthly installment, but now they basically "give" you that extra R50k to use. Alot of people took the R50k and bought a car or something useless with it, instead of actually paying off the loan.

In the end, people do it every year and every year their house would increase say R20k or something, and then they start "living" on that re-financing thing. So their loan just grows and grows [with the value of the house of course]. So in the end you make debt based on the growth of your house.

And then suddenly your house value drops or do not change or you try to sell and you can't sell it for the "re-financed" price. This is where i think alot of people is folding. Now you got to pay off a R500k home, which is effectively worth R400k and the other R100k you're paying off a car or some side investment under the guise of "re-financing". So you took the "profit" you "might have received" if you sold your house in a given year and expanded your loan so you can use the money without actually selling the house.



Obviously if they say your premium will be LOWER after re-financing, i dunno what they actually DO to your loan though ??????

Either way, i'd watch out for this thing in the current market. It's this type of "trick" that got alot of people into trouble when rates changed and markets slowed down.
 
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If you have been paying for a few years and re-finance the payment term is pushed out to 20 years again. So if you've been paying for 5 years you should have 15 years left but refinance and now you have 20 years left again. If your requirement/desire is lower monthly payments then this may be a valid option and is probably why they are giving the advice in the way they are.

If (as you mention) you are making regular extra payments into the loan the term is not totally relevant because the extra payments mean you'll pay it off sooner anyway and never pay the full interest amount.

BUT - at the time you do the refinancing the bank is basing their calculations on the fact that they will be earning interest for an extra 5 years so you are doing them a favor. SO - regarding the fees for re-financing. Tell them you are willing to re-finance only if they charge zero fees.

It could also depend on the nature of your finance agreement. Some finance contracts require you to 'capitalize' the extra cash in your account. I had this happen once with a car loan. I had paid in a few 1000 extra than required but in order for the payment or interest to be reduced (on my specific type of loan) the bank had to deduct the extra cash from the original amount loaned. This meant they actually had to create a new account on their side and start their calculations from scratch. In this case the term did not increase but I also lost access to the extra cash i.e. if I wanted the extra cash back I could not get to it.
 
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Shot guys!
That really puts my mind at ease :)
The bank is Standard Charter Bank ( the old Twenty20). Not one of the Big 4.

I am definitely not going to re-finance the loan, since I should complete the loan repayments within a year anyway (hopefully) + I am allergic to debt. :D

I thought something was a bit fishy with free advice from bank who has never had advice before! But they made no effort to explain the whole thing.

Thanks for the explanation.
 
In short i'd say "re-financing" directly translates to "stay in debt for longer and for more" .

If they simply extend your loan so you can pay it off over a longer time, that effectively means you pay more [by paying less per month] if you calculate the sum total. This is where the bank get their money, the interest ;).
 
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hi Ant101

Last yearI asked Nedbank to adjust my monthly repayment to R100 pm after settling most of my home loan debt via cash lump sums. It cost me absolutely nothing. Maybe just first ask Standard Charter to give you a complete cost break-down before you make your decision. Only when they need to get the lawyers in and draw up a whole new contract, it could cost you several thousand rand in fees.

Good luck with your decision and well done on those extra repayments!
 
PS: If you are paying in extra every month, you obviously don't have cash flow problems and don't need to lower your premium. I only reduced mine because I was very close to a zero balance and want to keep my loan account open to avoid the legal fees of drawing up a new contract when I buy another or bigger place.
 
ant101 said:
The bank is Standard Charter Bank ( the old Twenty20). Not one of the Big 4.
Click to expand...

Not one of the Big 4 in SA but very much one of the worlds biggest financial institutions - just checking that you're not under the impression they are a small company.

From Wikipedia:
http://en.wikipedia.org/wiki/Standard_Chartered_Bank
Standard Chartered Bank (LSE: STAN, SEHK: 2888,OTCBB: SCBFF) is a British bank headquartered in London with operations in more than seventy countries. It operates a network of over 1,700 branches and outlets (including subsidiaries, associates and joint ventures) and employs 73,000 people.
 
Yeah, I know they are big (did my homework before climbing into bed with them!), but that does not mean they are any good, so I'm real keen to climb out soon!!
They have really run the local brand into the ground and scaled down some outstanding services which were linked to the old 20twenty brand.

They have gone so far as to withdraw bond agreements (such as having your surplus funds available for withdrawal) Something you could really take them up on I'm sure, since it was an agreement.
There is also constantly silly letters from the CEO, stating they are down scaling this and that. Quite frankly some of it is quite embarrassing. The last letter about a year ago (issued and signed by the CEO) stated that all homeloans would be transferred to REAL People as from date xyz. So I promptly phoned the new call center after date xyz, only to get a member of staff from standard charter to tell me that I must IGNORE the CEO's letter. :eek: and there has been no followup letter since.

Which really makes me question a lot of things on how things are run.
It's pity they had a good thing going at one point.
 
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