# To re-finance or not to re-finance?

A refinance could be the best move you can do to save money and lower your current mortgage costs. A refinance is the simple act of replacing your current home loan with another home loan that works better for you.

There are many reasons why you might want to do a refinance. We will go over most of the different possible scenarios that we have seen with our clients in the UAE. We will assess all the benefits you might reap from a refinance. We will also address all the costs involved with a refinance. Hopefully this cost-benefit analysis will help you make the right decision.

Why refinance ?

**Refinance to pay a lower interest rate**

Let’s say you took on a mortgage with a fixed rate of 3.25% for the first two years. You are now one month before the two year limit is about to end. You find that the revert rate, or your new rate, will be around 5% - depending on the EIBOR, subject to further increase as the EIBOR might grow.

This might be a great case to look for a refinance, you can jump to another mortgage that might have a similar interest rate of 3.25% and extend your fixed period from two years to a total of four years. This could mean enough time before you intend to sell your property.

**Let’s take a detailed example:**

Your current loan:

property price of 1 million dirhams with your starting equity at 25%, or 250,000 AED

at a 3.25% interest rate loan fixed for the first two years

reverts to 3% + EIBOR, let’s say around 5%

Loan Term for 25 years

This means a monthly mortgage payment of:

3,655 AED for the first two years

a starting monthly mortgage payment of 4,384 AED (a 20% increase in your monthly payment) subject to increase as EIBOR increases after year 2

Your new Loan:

property price of 1 million dirhams with your starting equity at 25% + 21,452 AED in principal, or 250,000 + 21,425 = 271,425 AED - i.e a starting equity at 27%

at a 3.25% interest rate loan fixed for the first two years

reverts to 3% + EIBOR, let’s say around 5%

Loan Term for 23 years (Assuming you don’t want to extend your loan term

This means a monthly mortgage payment of:

3,759 AED for the first two years (a 3% increase in your monthly payment)

a starting monthly mortgage payment of at least 4,456 AED subject depending on the EIBOR after four years (this payment could be even higher).

This means you could potentially be saving at least a 17% increase on your monthly mortgage payments for the next two years.

Feel free to use our mortgage calculator to simulate more scenarios and calculate your monthly payment >

**Factoring in Costs**

There is a potential caveat to our above simulation in that we did not factor in the costs of refinancing.

The costs of refinancing in Abu Dhabi are the following:

Mortgage Processing Fees: Up to 1% of loan value

Valuation Fee: around 2,500 to 3,000 AED

Break Cost: 1% of the loan amount of 10,000 AED, whichever is lower

The costs of refinancing in Dubai are the following:

Mortgage Processing Fees: Up to 1% of loan value

Valuation Fee: around 2,500 to 3,000 AED

Mortgage Registration Fee: 0.25% of loan amount + 290 AED

Break Cost: 1% of the loan amount of 10,000 AED, whichever is lower

In the case of Abu Dhabi and in a worst case scenario, our refinance costs will be

Mortgage Processing Fees: Up to 1% of 750,000 = 7,500 AED

Valuation Fee: 3,000 AED

Break Cost: 1% of the loan amount = 7,500 AED

Total Cost of 18,000 AED which really eats out most of the equity we built up in the past two years pushing us back to the following terms:

Your New Loan:

property price of 1 million dirhams with your starting equity at 25% + 21,452 -18,000 AED in principal, or 250,000 + 21,425 = 253,425 AED - i.e a starting equity at 25.3% ~ around 25%

at a 3.25% interest rate loan fixed for the first two years

reverts to 3% + EIBOR, let’s say around 5%

Loan Term for 23 years (Assuming you don’t want to extend your loan term)

This means a monthly mortgage payment of:

3,862 AED for the first two years (a 6% increase in your monthly payment)

a starting monthly mortgage payment of at least 4,456 AED subject depending on the EIBOR after four years (this payment could be even higher).

Still this means you could potentially be saving at least a 14% increase on your monthly mortgage payments for the next two years and refinancing still makes sense here.

**A thing to note about re-financing costs**
All re-finance costs are negotiable and usually banks hate to see you leave to take a loan from a competitor bank. We at EquityFinders can help waive your valuation fees, and negotiate on your behalf to secure more favorable terms from most of the banks in the UAE. Schedule your free consultation here to inquire about a re-finance >

**Another thing to keep in mind is your property value**

So far we have assumed your property value to remain fixed in the two years. This is mainly because real estate prices have remained relatively flat in the UAE over the past two years. However this might very well change over the coming years and you will need to factor that into your refinancing analysis.

If after two years your property value increases by 20% then this makes a huge case for a refinance, as now you will receive a loan that not only covers your old loan, but also will inflate your equity in the property by 5% instantly.

**Extending your loan and lowering your monthly payments**

Another thing to note in the above example, we assumed the new loan to be a 23 year loan. We did so assuming you don’t want to extend your loan term another 2 years. But if you are willing to keep paying mortgage payments for another 2 years, or if you are thinking of selling your property soon then this means in our example your new monthly payments will remain at the level they were saving you a 20% increase on the next two years.

**Shortening your loan to avoid additional repayment fees**

On the other hand, your employment situation might have drastically improved and you are now looking to make additional repayments to pay back your home loan in 10 years instead of the initial 25 years. In this case, the bank is allowed to charge you repayment fees. To avoid accruing repayment fees, you can refinance to a new loan with a shorter loan term and save money.

**Refinancing to get a new loan type**

Lastly, you might have taken on your home loan as a non-resident. You recently got your residence visa, and your immigration status in the UAE has just changed. In this case, a refinance almost always makes sense as lenders are willing to offer lower interest rates to UAE residents.

**Final Word**

A mortgage is potentially the largest debt burden you have to carry. It is always a wise move to re-assess your mortgage terms every year. Look at recent changes to your mortgage terms, employment status, or the recent real estate market as a whole to decide if a refinance is best for you.

We highly recommend you reach out to an EquityFinders accredited mortgage advisor for a free consultation. With 15+ years of experience in the UAE real estate market, the team behind EquityFinders is by far your best bet to position the perfect refinance for you.

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