Refinancing and consolidation. Will it save money or is it just a trick?
Transfer your loans to us, you will save. This is the frequent advertising slogans of banks. But is that true? Can we really save money by transferring a loan or even several loans to another banking institution? More commentary at arbeiasociety.org.uk
Every person is quite skeptical about similar promises. The reader Jiří repays the mortgage, which he financed the reconstruction of the apartment. When the fixation period ended and the current bank offered 4.5 percent interest for the next period, at a time when banks, including his bank, offered new clients interest rates below three percent, he got angry and wanted to transfer the mortgage elsewhere.
The bank quantified the outstanding balance and he addressed several banking institutions. Although the competition offered almost half the interest, did not get under the payment then, and eventually stayed with his bank. “Now I am approaching the deadline for the end of fixation, does it make any sense to refinance the mortgage?” He asks.
What about the savings promises? Isn’t this just an advertising trick? Can we really save money by transferring a loan or mortgage? We asked for you.
Refinancing of one loan
We usually refinance mortgages when our bank does not want to accommodate us or offers such conditions that are unacceptable for us. If we refinance the loan on the anniversary of fixation, the repayment of such a loan will be without any sanctions. And in some cases, refinancing may pay off.
“In addition to the amount of interest, it is necessary to look at other parameters of the mortgage, such as fees for mortgage management, for drawing a loan, for maintaining a current account, which is usually a mortgage obligation and of course repayment or the possibility to adjust the amount of the repayment, ”recommends Lite bank spokesman.
According to George at Lite Bank, refinancing accounts for about half of mortgage clients. “Clients come to us not only because of the low-interest rate but also because they can repay any part of the loan at any time without fees and penalties,” says the spokesman.
With a market share of almost 30 percent, Lite Bank is the market leader in mortgage loans. Her spokeswoman says the importance of refinancing has been decreasing recently, as banks have focused more on high-quality services to retain their clients.
“Refinancing is a more complicated process, there is not only a change in the bank but also a change in collateral or often insurance and so on. Therefore, we recommend that the client always inquire primarily in his bank what he/she offers, ”explains Andrea, a spokeswoman of Lite Bank.
If you are considering refinancing your mortgage, count well. The comparison is very simple. “The new loan will only be set for the remaining maturity, and if we change the interest rate, reduce the repayment and do not have a big cost to switch to another bank (cadastre, estimate, etc.), we can save tens of thousands of crowns,” Jenny.
Since July 2008, the client has been repaying a mortgage loan of USD 1,700,000, with a maturity of 30 years, with an interest rate of 5.59% pa fixed for 10 years.
In January 2018, when the client approached his bank to ask for a new rate for the next period because he was afraid of CNB interest rate growth and could have a significantly higher rate in the summer, the bank refused to provide it with it too early, and they will reach out to the client within a standard term of six weeks prior to fixation.
The client, therefore, bet on the security and decided to refinance his loan. At another bank, he obtained a rate of 2.39% pa again for 10 years.
Refinancing the loan
|Original loan||New loan|
|Loan Amount||USD 1,700,000||1 406 768 USD|
|Maturity||30 years||20 years|
|Interest rate||5.59% pa||2.39% pa|
|Amount of installment||9 749 USD||7 379 USD|
|Refinancing costs||3 100 USD|
|Savings in 10 years||284 440 USD|
Consolidating multiple loans
If we have more liabilities in the domestic loan portfolio with different maturities, the comparison of the final profit is much more difficult. Consolidation always depends on what we want to achieve and what is our priority. “It is not always the most important to save on interest at all costs, sometimes it is far more important to reduce monthly expenses to a minimum and thus free up the domestic budget,” explains Webank.
“By consolidating their loans, clients can reduce their monthly payment and in some cases save directly by getting a new lower rate,” says Rad Bank spokeswoman Jana. For higher loans are often lower interest rates.
“Further savings can also come from paid premiums and account maintenance fees, which may be mandatory for the loan, especially if the client has loans with multiple banks,” confirms Goodbank spokeswoman Petra. As part of the consolidation, the client can even solve other financing needs and get new cash.
As a result, consolidation usually extends maturity and thus reduces the monthly payment. “If we then set up regular savings and reserve creation, we can consider our actions successful,” Webank says.
For example, in the case of long-term savings, it will be possible to repay the loan early or later and to return the resulting balance of interest paid back to our advantage. However, carefully consider and calculate well before deciding on loan consolidation, or contact your financial advisor. In any case, remember that only those borrowers who are properly repaying their obligations can consolidate their loans.