Mortgages are becoming more expensive: on August 15, the Central Bank unscheduled raised the key rate to 12%. Following this, the percentage at which commercial banks lend for the purchase of housing also increased. We’ll figure out whether it makes sense to refinance old loans with rising rates, how much it costs, and in what cases it won’t work.

BRIEFLY ABOUT THE MAIN THINGS:

Mortgage refinancing is profitable if the difference between the current and potential rates is 1–1.5 percentage points:

• You took out a loan from a small bank at a high interest rate because of a low credit rating or because you could not officially confirm your income, but now the situation has changed.
• You got married and want to add a co-borrower.
• In addition to your mortgage, you have other loans that may be beneficial to combine into one.
• Your family meets the conditions of the Family Mortgage program (from the summer of 2021, this includes families with one child born after January 1, 2018).

Refinancing is unprofitable:

• You have paid off more than half of your debt.
• The agreement provides for additional payments for early repayment of debt.
• You received a mortgage as a salary employee or under a preferential program.
• Your age is retirement or pre-retirement.
• You are not expected to have a stable white income in the near future.

Refinancing is losing its appeal, but not for everyone

Over the past year and a half, the key rate of the Central Bank of the Russian Federation has changed four times: 20% in February 2022, a gradual decrease to the autumn 7.5%, a long plateau until the summer of 2023 with a slight rise at the end of July to 8.5% and then less than a month later – a jump to 12%.

The reduction in the Central Bank rate towards the end of last year gave impetus to the refinancing of previously taken loans. Now the regulator has again taken a course towards an increase and it seems that profitable refinancing in such conditions will come to an end.

Banking market participants recommend that those who have not yet refinanced their mortgage take advantage of the opportunities that are still available.

FOR REFERENCE

Mortgage refinancing refers to paying off a loan with a new loan for the same property. Money for this can be given either by the same or by another lender. With refinancing, you can lower your mortgage rate, reduce the monthly payment, reduce the loan repayment period, or switch to a more convenient bank.

The arithmetic is very simple: until 2020, the bulk of mortgage loans were taken out at 10–12% per annum. Banks (before the last rise in the key rate) offered refinancing at an average rate of 8.6%. The benefit is obvious: the monthly payment is reduced, and the final overpayment on the loan becomes less. Now conditions are becoming stricter, but refinancing can still be beneficial for many borrowers.

When is it profitable to refinance your mortgage?

Situation 1: if the credit load is too high

Most experts agree that refinancing a mortgage is beneficial when the difference between the current rate and the potential rate is 1.5 percentage points or more.

The exception is situations when the client has repaid more than half of the loan and is paying mostly not interest, but the body of the loan. Here, refinancing is appropriate only if the monthly payment has become uncomfortable for you and it is not possible to maintain the payment schedule.

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It also happens that a borrower once had to take out a loan from a small bank at a high interest rate due to a low credit rating or lack of proof of white income. But now the situation has changed, and the borrower’s rating allows him to refinance a loan from a large bank on more lenient terms.

EXAMPLE

Without a confirmed white income, in January 2022, Ivan took out a mortgage for an apartment worth 3 million rubles at a rate of 14.5% for 25 years in a small bank. For 1.5 years, he paid only 16 thousand rubles of the principal debt, the rest went to interest.

In 2023, the situation changed: Ivan changed jobs, his credit rating increased and the salary bank approved refinancing at 9.7% . This will allow you to reduce the monthly payment by almost a third, and in the future – reduce the overpayment if Ivan uses the freed up money for early repayment of the loan.

It is logical to refinance a loan if the borrower has gotten married and wants to add a co-borrower. In this case, you will still have to obtain the bank’s consent and add an essential condition to the contract, so at the same time you can launch a refinancing procedure – for example, in the same bank, but at a more favorable interest rate.

Another possible scenario is if you have other loans in addition to your mortgage. In this case, it may be advantageous to combine them into one: monthly payments will be reduced, and you will only have to interact with one bank. Some financial institutions allow you to combine up to five loans from different banks.

Situation 2: if there is a child in the family

Under preferential mortgage programs, rates are still kept at the same level by the state, so refinancing is still advisable for those clients who fall under the extended terms of a family mortgage.

Previously, benefits only applied to families with two or more children. But from July 1, 2021, families with one child born after January 1, 2018 can apply for a loan under this program.

The rate under the program is up to 6% per annum, but can be further reduced by the bank.

EXAMPLE

A family with a child born in the fall of 2018 has a mortgage debt balance of 7.5 million rubles, an interest rate of 8.5%, a loan term of 18 years, a monthly payment of 64.9 thousand rubles.

When refinancing under the Family Mortgage program, the bank reduces the rate to 4.95% , the term increases to 25 years, the monthly payment will be 43.9 thousand rubles , and the savings over the entire loan term will be 2.79 million rubles.

An important point: the previous mortgage must be issued for the purchase of housing from the developer. A home construction loan cannot be refinanced.

A previously issued family mortgage can also be refinanced through a re-borrowing.

IMPORTANT

Until 2018, maternity capital funds could be used to refinance loans, but only if these financial obligations arose before the birth of the second child or subsequent children – that is, before the moment when the parents received the right to MSC.

As of 2021, this restriction has been lifted, allowing capital to be spent on refinancing mortgage loans regardless of when the need arose.

When is it not profitable to refinance your mortgage?

Before starting the refinancing procedure, it is worth carefully calculating all the costs (we will talk about them later). It is advisable to involve a specialist, since some costs will not be obvious to an ignorant client. But even if you have compared the interest on the current loan and payments in the event of its refinancing, calculated additional costs and received figures that are tempting at first glance, do not rush to run to the bank.

It is better to refuse refinancing if:

1. The loan term has exceeded half. Then there is little point in refinancing: with an annuity payment scheme, most of the interest has already been given to the bank, and the principal debt will occupy an increasingly larger share in the payment structure.

FOR REFERENCE

An annuity payment scheme is a loan repayment procedure in which it is paid in equal installments. At the same time, at first interest predominates in the monthly payment, but their share gradually decreases and towards the end of the repayment period the payment consists almost entirely of the principal debt.

If you refinance such a loan, most of the payment structure will again be taken up by interest, since from the bank’s point of view it will be a new mortgage.

And if the mortgage was issued less than six months ago, it will not be possible to refinance the loan at all: banks do not provide such an option.

2. If the mortgage agreement specifies additional payments for early repayment of the debt (the so-called lost profit).

3. If the borrower received a mortgage as a salary client or under a preferential program.

4. If the borrower’s age is retirement or pre-retirement. In this case, the chance of approval of a new loan is small, and you will have to spend a lot of effort, time and money.

5. If you want to get a tax deduction on interest, you need to be especially careful. Refinancing a mortgage with a commercial bank does not deprive you of this right (Article 220 of the Tax Code of the Russian Federation). However, it happens that money for on-lending to banks is given by other organizations that do not have a banking license. Previously it was AHML, and now JSC Dom.RF is a financial development institution in the housing sector (not to be confused with the bank of the same name).

If the client received money from the account of such an organization, he subsequently loses the right to deduct interest.

In this case, you can only count on a property deduction and compensation for interest already paid under the old agreement. Therefore, when refinancing a mortgage, it is important to clarify in advance (even with the bank) exactly where the funds will come from.

The second important point is that the new agreement must contain a reference to the original mortgage agreement, otherwise it will be impossible to prove the targeted nature of the loan (that it is a housing loan). This is especially true for those who are refinancing their mortgage for the second time – there is a greater chance of “losing” the original data.

How does the procedure work, how much does it cost, what documents are required?

The path to refinancing a mortgage consists of several steps:

1. Find a bank that offers the best conditions. Let us remind you that refinancing a mortgage is considered profitable when the difference between the current and potential rates is 1.5 percentage points.

2. Apply – this can usually be done online. With its help, the bank gets to know a potential client, evaluates his income, credit history and decides whether to approve refinancing or not. Therefore, it is important to fill out the application thoroughly and correctly.

ADVICE

It is convenient to refinance a mortgage with the bank that originally issued it – there are no restrictions in this regard. They already know what the borrower is, and if he is a reliable client, they can offer good conditions. However, the “native” bank can also refuse.

Banks may have different requirements for documents, but in general they will need:

• passport;
• SNILS;
• work book (certified copy);
• 2-NDFL certificate (or other document confirming income);
• current loan agreement, payment schedule;
• certificate of loan balance.

Most likely, in a few days the applicant will receive a call from the bank with questions about work, salary, length of service, etc.

It is important not to have any arrears or arrears on your mortgage. If they are present, refinancing will most likely be denied.

3. If the application is approved, the new bank will need information about the property on which the mortgage was issued. During the initial registration of a mortgage, the documents for the property are provided by the seller, but when refinancing, this is the responsibility of the applicant.

To confirm the value of the property, an appraisal will have to be carried out. It is best to contact companies accredited by the new bank. Payment for the services of the appraiser is also borne by the applicant. As a rule, it costs several thousand rubles (the amount depends on the region).

In addition to the appraiser’s report, the package of real estate documents usually includes:

• property purchase and sale agreement;
• extract from the Unified State Register or certificate of ownership;
• cadastral passport;
• real estate insurance contract and payment receipt;
• certificate in form 40 (extract from the house register about registered residents);
• certificate of absence of debt on utility bills.

Thus, when refinancing, you will have to spend money on an appraiser, payment for insurance (it is issued anew in the new bank) and urgent interest on the repayment date (the amount of interest for the current month accumulated by the time of termination of the previous loan agreement).

INSURANCE ADVICE

If there is no rush, then the refinancing process can be started closer to the end of the current policy. When the old one runs out, you can immediately apply for a new one.

4. After checking the property, the new bank will be ready to close the debt to the old one in order to transfer the collateral to itself. Actually, at this stage refinancing occurs: the client signs documents for a fresh loan, and the bank pays off his debt.

5. Then the borrower needs to transfer the collateral from the old bank to the new one. If the mortgage is issued electronically, the new bank itself will submit an application to Rosreestr to change the encumbrance. If you have a paper version of the mortgage, you will have to do it yourself by paying a state fee. An inidual can submit an application, for example, through the MFC.

IMPORTANT

Until the new bank registers the mortgage in its favor in Rosreestr (the procedure can take up to a month), the loan is considered unsecured and may be subject to an increased interest rate. Typically the rate increase is 2–4 percentage points.

If you count all the costs (appraisal, state duty, interest difference, insurance), refinancing costs fall within a fairly wide range of 10–45 thousand rubles, depending on the region and the property. But taking into account the benefits of lowering the loan rate, even the maximum amount does not look so significant.

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