Pros and Cons of Mortgage Refinancing in Hong Kong
Thinking about refinancing your mortgage in Hong Kong? You need to understand the advantages and disadvantages of this financial move first.
According to the latest mortgage survey conducted by the Hong Kong Monetary Authority, there was an increase in refinancing mortgages in the region. To be specific, the increase is 13.3% – which now makes the refinanced loans a total of HK$5.6 billion.
Refinancing is quite similar to a traditional home loan in Hong Kong – except that there is a transition between the old loan and a new one. When you refinance your mortgage, you simply conclude your current loan so you can replace it with a new one. Also known as remortgage, this financial transaction is done by home-owners to acquire better terms in their mortgage.
If you find yourself having a hard time with your current home loan, it might be a good idea to consider refinancing it. But before you jump into it, make sure you understand the pros and cons of a refinancing loan.
Advantages of refinancing your house
There are three important advantages of refinancing your mortgage.
You can enjoy a lower interest rate.
The first and the most obvious benefit is a lower interest rate. If you think that your current mortgage has a high-interest rate, you can opt to refinance it to take advantage of a lower rate. There are many factors that can lead to this. If you have a better credit score than when you applied for the loan, you may be granted a lower interest rate. This is also ideal for those who originally applied while the mortgage rate was high in the market. If the current rates are down, you can also refinance to enjoy lower rates. A lower interest rate will help reduce your monthly payments – which will give you more breathing space in your budget. It will also save you from paying more on the interest amount for the duration of the loan term.
You can change from an adjustable rate into a fixed rate.
While fixed rate mortgages are usually the preferred type by mortgage borrowers, there are some borrowers opt for the adjustable rate type. This is especially true if the interest rate was low when the original application was made. This type of loan is characterized by a low fixed payment at the beginning of the loan – usually 10 years. After that period, the loan will adapt a variable rate – wherein the interest will depend on the benchmark rate. This can make you vulnerable especially when the interest rate spikes – leaving you with a higher monthly payment. Refinancing your mortgage would be a great way to change your adjustable rate mortgage into a fixed rate. With only one interest rate to depend on, budgeting your payments will be a lot easier. Of course, you need to time your application so the interest rate is low.
You can take advantage of your home equity.
Another benefit of refinancing your mortgage is to take advantage of the equity of your home. As you pay your mortgage, the home equity increases. When you refinance, the bank will loan you an amount that is equivalent to the value of the house. For instance, if your house is valued at HK$1 million and you have a 50% equity, you will get around HK$400,000 in cash (the refinancing usually does not let you borrow 100% of your home’s value). That cash can be used to invest, pay off a high-interest debt, or improve your home. If you use this wisely, you might be able to put it in an investment that will generate enough income to pay for the loan.
These benefits make refinancing a very attractive loan to borrow but you need to take a look at the disadvantage first before you make a final decision.
Disadvantages of refinancing your home loan
There are a couple of drawbacks that you need to consider about refinancing to determine if it is really a good financial move.
You have to pay refinancing costs.
To begin with, refinancing your mortgage will entail costs. You have to pay for the closing cost, the valuation of the house, application fee, credit report check, title search, etc. It is like applying for a new home loan. While the cost will be lower if you can refinance with your current lender, it will still add up to a significant amount. Are you ready to pay that much again? Sometimes, you may be too excited with the lower interest rate that you fail to realize that you paid more for this new loan.
You might be wrong in your assumption of a lower interest.
If you applied for a refinancing in hopes that you will get a lower rate, make sure this is really what you will get. Not only that, you want to get a significant decrease from your current rate. Otherwise, the effort to apply and pay the additional fees of refinancing. A 1% to 2% decrease should be reasonable. Any lower than that will not be worth your time. Make sure your credit report is really in good condition so you can get a lower rate.
You might be given a lower appraisal for your home.
Finally, your home might be appraised really low. If the worth of your property is lower than it was when you bought it, you might lose some money when you refinance your home loan. A low appraisal could forfeit the benefits of refinancing your mortgage. Also, it can lead to the disapproval of your refinancing.
It is important to do your research well before you finalize your decision to refinance your home loan. According to an article published on ChinaMoneyNetwork.com, there is a rise in properties with negative equity. It is actually a huge increase – 1,400% for the first quarter of 2016 compared to the quarter before that. You need to make sure that your property is not one of these before you refinance. Otherwise, refinancing your mortgage might not be a good idea – at least, not for now.
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