Mortgage refinancing helps to save significantly on interest payments by reducing the loan term or the amount of the monthly payment. We tell you when it is profitable to refinance a mortgage and when it is not worth it
After the Central Bank raised the key rate to 18% per annum at the end of July this year, the popularity of mortgage refinancing will steadily decrease. After all, in previous years, mortgage loans were issued at lower rates, and no one will switch to a new bank at a higher rate in order to overpay.
Over the past two years, the refinancing rate has increased significantly. Thus, according to the Unified Housing Information System (UISWS), at the end of July 2024, the average mortgage refinancing rate for 20 leading mortgage banks in the country was 19.55%. At the end of May, the average refinancing rate was fixed at 17.56%, at the beginning of this year — 17.08%, at the end of July last year — 11.37%, and at the end of July 2022 — 10.2%. And if you refinance a loan taken at a lower rate, the borrower’s monthly mortgage payments will only increase.
We tell you when it is profitable to refinance a mortgage, how to do it and in which cases it is not worth doing.
Table of contents:
- What does it mean
- Refinancing a mortgage now
- When is it profitable to refinance
- When it makes sense to refinance
- Is it possible to refinance a mortgage with the same bank
- Which bank is more profitable
- What to consider when refinancing
- Documents for mortgage refinancing
- When is it not profitable to refinance a mortgage?
- Reasons for possible failure
What does it mean to refinance
Refinancing, or re—crediting an existing loan is the same mortgage. It allows you to fully or partially repay an already issued loan at the expense of a new one on more favorable terms. Thanks to refinancing, the borrower can reduce the loan rate, reduce or increase the mortgage repayment period, and reduce the monthly payment amount.
When is it profitable to refinance a loan?
Photo: Kirill Kukhmar / TASS
It is advisable to refinance the loan only if it helps to reduce the rate by at least 1.5%, the VTB press service says. Sberbank notes that it is profitable to refinance a mortgage if the current rate of the client is at least 1% higher and there is more than a year left to pay. According to realtors from the Best-Novostroy real estate agency, this procedure can be beneficial if you have recently issued a mortgage, the rate differs from the existing one by about 2% and your income has not changed.
Mortgage refinancing is currently irrelevant
The refinancing program was relevant during a period of declining mortgage rates. This was beneficial in the first half of the total loan term, when most of the monthly payment was interest. It was advisable to refinance a mortgage loan if the difference in the rate was at least 1.5-2%, says Nadezhda Stadnyuk, head of the mortgage department at Best-Novostroy. According to the expert, in the conditions of a high key rate from the Central Bank and rising mortgage rates, the refinancing program is not relevant in the vast majority of cases.
Only refinancing under the Family Mortgage program remains relevant and interesting now. If the client initially applied for a loan under the standard program, and then his family status changed and a child was born, then the client can refinance his loan, provided that the ratio of the first installment and the loan is 20 to 80, the loan amount is no more than 12 million rubles. and the purchase of real estate was issued according to the DDA or the PREP from the developer, adds Alexe Novikov, Director of the Mortgage Lending Department of the Est-a-Tet real estate agency.
The meaning of refinancing will appear after the reduction of the key rate
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Experts believe that it will be possible to talk about the resumption of interest in refinancing under market programs when the Central Bank begins to reduce the key rate, and mortgage interest rates go down. In other words, we must wait for the moment when the new mortgage conditions will become significantly better than the existing ones.
However, the head of the Central Bank, Elvira Nabiullina, does not rule out that after some time the key rate will be reduced. And then borrowers who take out market mortgages now and at high rates will be able to refinance loans and pay less on them.
Example of refinancing
Est-a-Tet provides an example of mortgage refinancing: with a current loan at 20%, a mortgage debt balance of 3 million rubles and a loan repayment period of seven years, the monthly payment amount is 66.62 thousand rubles.
When refinancing this loan with a reduction in the rate to 18% per annum, the amount of the monthly payment will decrease to 63.05 thousand rubles. Thus, the amount of the monthly payment at the rate of 18% per annum instead of 20% is reduced by 3.56 thousand rubles, and the total amount of overpayment on the loan will be less by 300.9 thousand rubles.
Is it possible to refinance a mortgage with the same bank?
You can apply for a reduction in rates to the bank where the mortgage loan was originally taken out. Consideration of the application may take up to 90 working days. A change in the current bank’s terms is called restructuring, not refinancing. However, banks often refuse to change the terms of the current mortgage agreement. If the bank does not refuse, then reducing the rates will not require collecting all the documents again and registering insurance.
Mortgage refinancing — 2024: which bank is more profitable
At the end of July 2024, the average mortgage refinancing rate in the top 20 Russian mortgage banks is 19.55%.
Sberbank offers refinancing from 19.8% per annum. The loan term is up to 30 years, the maximum amount is up to 30 million rubles. Refinancing applies to mortgage loans, secured by both ready-made facilities and real estate under construction.
In VTB, the program is available at a rate of 19.5%, in Dom Bank.RF” — 20.3%, in Alfa-Bank — 20.19%, in T-Bank — 18.9%, and in Sovcombank — 20.99%.
Refinancing is available at Uralsib Bank at 18.99% per annum, at Absolut Bank — 20.05%, at Moscow Credit Bank — 19.25%, and at Kuban Credit Bank — 20.9%.
What needs to be considered
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The decision to refinance a mortgage loan should be considered and balanced. It is also necessary to take into account the costs of conducting the transaction itself and compare them with the future benefits of refinancing. Since this is, in fact, a new loan, the client needs to re-issue a real estate valuation report, a life and health insurance policy, and registration of ownership of real estate.
This requires certain costs. For example, the state fee for registering a pledge will be 0.5–1 thousand rubles, an apartment assessment report will cost 5.5 thousand rubles (depending on the object and its location), you will have to pay about 1% of the loan amount for new insurance, 750 rubles for an extract from the Unified State Register, and for the notarized consent of the spouse to the transaction — about 2.5 thousand rubles more. You may also need to pay for a cell or issue a letter of credit at a bank, a percentage or a fixed amount may be charged for transferring funds from one bank to another.
During the transition period, the new bank (before registering a new collateral) sets an increased interest rate for the borrower, adding 2% per annum to the current rate, realtors from Best-Novostroy give an example. This is done in order to encourage the borrower to collect all certificates and documents more quickly, they explain.
Another stop factor may be the property deduction and interest deduction. After refinancing, you can only count on a deduction under the main agreement and compensation for interest for the paid period. After re—crediting, it will no longer be possible to do this, since this is a mortgage by virtue of the contract – such an option is not available for her, says Irina Dobrokhotova, founder of Best-Novostroy.
Documents for mortgage refinancing
Refinancing is the same procedure as the initial issuance of a mortgage loan. The borrower needs to provide a certificate of income, collateral documents — a standard package required to approve an application for a mortgage loan. When refinancing under the state program of mortgage lending to families, birth certificates of children will be required at the birth of the second and subsequent children.
To approve a new loan (refinancing) at another bank, you will need a standard set of documents:
After the loan is approved, you will also need:
When refinancing is unprofitable
Refinancing a mortgage may be impractical if the client has already repaid more than 50% of the loan. Now most banks issue mortgages with an annuity payment scheme, when first the main interest is paid, and then the body of the loan. It turns out that the longer you pay the loan, the less you will save on overpayment of interest. Therefore, it is necessary to calculate whether the difference in overpayment on the loan will cover the costs of obtaining a new mortgage. In any case (regardless of the timing), refinancing will help reduce the current financial burden — monthly loan payments.
Reasons for possible failure
The bank will assess the borrower’s solvency. If income has decreased recently and it is not enough to make a mortgage payment (the payment should not exceed an average of 40-60% of the monthly family income), the credit institution may refuse to refinance. In addition, the bank will check the housing that is secured by the loan. If it has fallen into disrepair or, for example, is located in an emergency house, a mortgage loan may also be refused. If there were delays on the current loan, there is a current overdue debt or there was a restructuring — this is also a possible reason for refusal.
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