Purchasing property in Ghana, whether for personal residential use or as an investment, often requires taking out a mortgage loan. While initial mortgage terms may have made sense at the time, changing personal financial situations or fluctuations in the mortgage market can make refinancing an attractive option. This guide will provide an overview of mortgage refinancing in Ghana – who it benefits, what to consider, and how the process works.
What is Mortgage Refinancing?
Mortgage refinancing involves taking out a new mortgage loan to pay off an existing one. The goal is to obtain better terms, such as a lower interest rate, lower monthly payments, or to switch from a variable to a fixed-rate mortgage. Refinancing effectively restarts the clock on your mortgage by setting up a new loan term and schedule of payments.
Reasons to consider refinancing in Ghana include:
- Lower Interest Rates – Interest rates fluctuate over time. If current rates are significantly lower than your existing mortgage, refinancing could dramatically reduce your payments.
- Cash-Out Equity – If your property value has increased, refinancing allows you to access your equity through a larger loan amount. This cash can be used to fund home improvements, investments, debt consolidation, or other expenses.
- Adjustable Rate to Fixed Rate – An adjustable-rate mortgage poses an interest rate risk when rates rise. Refinancing to a fixed rate provides stability and locks in a low rate for the long term.
- Shorter Loan Term – Refinancing to a shorter mortgage term means you pay off the loan faster. This reduces your total interest costs over the life of the loan.
- Change in Financial Situation – Life changes like a new job, higher income, or growing family might warrant refinancing for a more suitable mortgage plan.
Before rushing into refinancing, be sure to calculate all costs and scenarios to determine if it makes financial sense for your situation. Work closely with a mortgage specialist to understand your options.
Factors to Consider Before Refinancing
Refinancing a mortgage is a major financial decision that comes with pros and cons to weigh. Important factors to take into account include:
Current Interest Rates
Ideally, interest rates should be at least 2% lower than your current mortgage rate to make refinancing worth pursuing. This threshold accounts for closing costs and ensures meaningful savings over time. Check prevailing rates and where they stand historically to gauge good timing for a refi.
Closing Costs and Fees
Refinancing comes with various upfront costs like processing and underwriting fees, appraisal fees, and legal charges. Closing costs typically run 2-5% of your loan amount. The savings from a lower rate must exceed these costs within a reasonable timeframe to justify refinancing.
Loan Term and Amortization Schedule
Will refinancing restart your payments at the beginning of a new term, or pick up where you left off in your existing amortization schedule? This impacts your timeline for paying off the mortgage. Carefully consider term length and amortization to find the optimal reset point.
Your Time Horizon and Plans
How long do you plan to stay in the home? Is there a chance you may sell or move within 5-7 years? Refinancing works best if you know you will keep the home long enough to reap the benefits of better rates and terms over many years.
Impact on Home Equity
For cash-out refinancing, carefully weigh how much equity you want to tap and how it will impact long term wealth from your property. Limit cash-outs to only essential needs to avoid eroding too much equity.
Tax and Insurance Implications
Consult professionals to understand if refinancing will affect costs like mortgage insurance, property taxes, income tax deductions for interest paid, or capital gains tax when selling the property. Make projections with any impacts in mind.
Refinancing Process Overview
Refinancing follows many of the same steps as obtaining an initial home purchase mortgage:
1. Assess goals and situation – Why do you want to refinance, and what mortgage features are most important? Review finances and property value to start planning.
2. Check credit and eligibility – Good credit score and manageable existing debts improve approval odds and terms. Lenders will re-verify income, assets, and eligibility.
3. Choose a lender and apply – Shop and compare multiple lender quotes. Submit financial documents and paperwork for underwriting once you apply.
4. Complete valuation appraisal – An appraiser will evaluate the current fair market value of your property. This determines the amount eligible to borrow through refinancing.
5. Receive loan decision and close – If approved, you’ll lock in final terms and interest rate. Then complete the closing process to secure the new loan and pay off the old mortgage.
6. Make first payment – The first payment on the refinanced mortgage is due the following month after closing. The term count and amortization schedule reset at this point.
Having a mortgage advisor to guide you through the process can optimize the outcome and experience. Be ready to act fast when applying, as interest rates can fluctuate frequently.
Should You Refinance in Ghana? Pros and Cons
Below we summarize some of the key advantages and potential drawbacks of refinancing a mortgage in Ghana’s market. Consider both as you evaluate plans:
- Lower interest rate and monthly payments
- Shorten repayment terms and pay off the mortgage faster
- Switch from adjustable-rate to fixed-rate mortgage
- Access cash-out equity for other financial needs
- Opportunity to re-amortize and reset payment schedule
- Potential tax deductions from mortgage interest
- Closing costs and fees eat into savings
- Starting mortgage term over with new costs and time horizon
- Risk of interest rates dropping again soon after refinancing
- Limiting future cash-out equity with new financing
- Difficulty qualifying if financial situation has worsened
- No guarantee property value will continue to rise
For many Ghanaian homeowners, refinancing advantages can provide real financial flexibility and savings over time. However personalised due diligence is required to determine if benefits sufficiently outweigh any drawbacks or risks.
5 Key Questions to Ask Before Refinancing
These crucial questions should be addressed to decide if refinancing your Ghana property mortgage makes good financial sense:
- How much will monthly payments decrease? – Project exact savings based on current rates to quantify benefit.
- How much equity can be accessed in a cash-out? – Assess if it’s wise to tap equity now or keep it for later.
- How fast will refi costs be recouped? – Closing costs must be recovered within a reasonable timeframe.
- Can better terms be secured? – Compare term lengths, rate types, and other mortgage features.
- Will the home be kept beyond the break-even point? – Savings fully realized only by keeping the home long term post-refi.
Answering these and running all the numbers with a mortgage expert makes weighing a refinancing decision much easier. Don’t leave potential savings on the table.
5 Tips for Mortgage Refinancing Successfully
Follow these suggestions to ensure you end up with the optimal mortgage loan if refinancing:
- Improve your credit score – Better credit means better loan terms. Pay down debts and resolve errors to boost your score.
- Get multiple lender quotes – Don’t just go with your existing lender. Shop and compare quotes from at least 3 lenders.
- Pick shorter loan terms – Reduce interest costs long-term by choosing the shortest term comfortably affordable.
- Make a larger down payment – Putting 20% or more down avoids private mortgage insurance.
- Lock your rate ASAP – Interest rates can shift frequently. Lock in low rates as soon as you decide to proceed.
These steps will put you in the best position to maximize savings and get a great refinanced mortgage.
Mortgage Refinancing Scams to Watch Out For
Unfortunately, some predatory lenders and scammers try to exploit unwary borrowers seeking to refinance. Be very cautious of the following schemes:
- Upfront fee scams – Avoid lenders asking for large upfront “appraisal” or “processing” fees before providing loan terms.
- Excessive penalties – Don’t accept egregious prepayment penalties just for refinancing with the existing lender.
- Predatory rates and costs – Compare all itemized costs. Refuse rates significantly higher than market without good reason.
- “Too good to be true” offers – Extremely low rates or cashback offers could be a dishonest teaser tactic. Verify legitimacy.
- Equity skimming – Shady brokers may pressure cash-outs at maximum appraised value, taking a large cut.
- Fake refi approval – Scammers collect fees with false promises of approval they can’t actually deliver.
Protect yourself by vetting every aspect of the transaction. Never pay unreasonable fees upfront or give sensitive information to unfamiliar lenders.
Should You Use a Mortgage Broker?
Mortgage brokers serve as intermediaries between you and potential lenders. Brokers offer these services:
- Access to a wider range of lenders and loan programs
- Assistance identifying the optimal loan types and terms
- Guidance in completing applications and paperwork
- Coordination handling underwriting and approvals
- Negotiation to secure favourable interest rates
The right broker provides expertise and convenience. They can present many options and steer you away from bad deals. However, brokers may charge service fees, and not all are ethical or competent. Carefully vet any broker prior to deciding if utilizing one makes sense for your situation.
Mortgage Refinancing and Debt Consolidation
Many homeowners refinance partly to consolidate other debts alongside their mortgage. This can transform higher-rate revolving debts into a fixed loan at lower interest. Debt consolidation through a cash-out refinance enables:
- Paying off credit cards, personal loans, vehicles, etc.
- Simplifying payments into a single manageable monthly mortgage payment
- Saving on interest compared to higher APR debts
- Accessing lump-sum cash to pay expenses
However, risks include the temptation to spend freed-up income rather than pay down debts. Refinancing also doubles down on property debt exposure. Get professional advice about the prudent level of debt and cash-outs.
How Interest Rate Hikes Affect Refinancing
When the Bank of Ghana benchmark rate rises, interest rates on mortgages and consumer loans also trend upwards. This impacts refinancing in a few key ways:
- Reduces the spread between existing mortgage rates and available refi rates
- Potentially delays refinancing until rates stabilize and fall
- Decreases savings available by refinancing into a higher rate
- Impacts affordability and eligibility if stricter underwriting follows rate hikes
- May prompt more urgent refinancing to lock in rates before additional hikes
Anticipating rate moves and constantly comparing options against the prevailing rate landscape helps ensure the best timing to refi. Don’t wait too long in periods of rising interest.
Refinancing When Self-Employed
Self-employed mortgage applicants face more scrutiny validating stable income since they don’t have traditional pay stubs. Be prepared to provide ample documentation like:
- Federal tax returns and financial statements for 2-3 years
- Corporate or personal bank account statements proving cash flows
- Signed contracts or invoices showing ongoing business revenue
- Proof of business licenses, registrations, locations
- Audited financial statements certified by an accountant
Having one or more years of these documents on hand before applying will help demonstrate ample income history and improve the chances of refinancing approval.
Is Refinancing Worth the Costs?
In general, you should aim for mortgage refinancing costs to be recouped through savings within 12-18 months. Use this formula to estimate your break-even point:
Refinance costs / (Old payment – New payment)
Refinance costs = $5,000 Old monthly payment = $2,000 New monthly payment = $1,500
$5,000 / ($2,000 – $1,500) = 10 months
In this case, the upfront costs are earned back in less than a year and a half through the lowered payment amount. That represents a worthwhile refinance investment. If the time period stretches longer, additional analysis would be required to see if refinancing still makes sense.
Alternatives to Refinancing
If refinancing is not the right move currently, consider these alternate options to lower mortgage costs:
- Recasting – Recast keeps the same loan and terms while re-amortizing the balance into lower payments.
- Modification – Your lender may allow modifying the loan terms through an official agreement.
- Prepay principal – Making extra lump-sum payments directly reduces your principal balance.
- Change due date – Adjusting the payment due date can help better align with your cash flows.
- Remove mortgage insurance – Ask lenders to eliminate PMI if you have 20%+ equity.
Discuss possibilities like these with lenders and mortgage advisors to create a solution that works for your situation if refinancing is not feasible or recommended.
Key Takeaways on Refinancing Property in Ghana
- Refinancing resets mortgage costs and terms via a new loan to replace existing financing. Lower rates and better cash flow are main goals.
- Carefully calculate all costs, risks and breakeven timetables before deciding to refinance. Work with a mortgage specialist to review options.
- Good credit, sufficient equity, and budgeting for closing costs are key to successful mortgage refinancing.
- Start the refinancing process prepared to document income, and equity, and compare multiple lender rate quotes.
- Keep an eye on interest rates and be ready to act when optimal conditions arise to refinance and maximize savings.
Refinancing a mortgage in Ghana can be a smart move in the right circumstances, allowing homeowners to access better rates, terms, and equity. But pursuing a refi should not be taken lightly, as new costs are incurred. Crunching the numbers with the guidance of a knowledgeable finance professional ensures you make a prudent decision.
With proper diligence and timing, refinancing can provide meaningful savings and flexibility. Weigh all options carefully based on your individual financial situation and goals to chart the optimal path forward.
For those seeking quality property investments in Ghana, VAAL offers exceptional 1, 2, 3, and 5 bedroom flats for sale at their flagship Harmonia Residence development in Airport West, Accra. Their energy-efficient residences blend modern amenities with accessibility, community, and natural ambience. Refinancing an existing mortgage could be your pathway to owning at Harmonia. Reach out to the VAAL team today to learn more and discuss financing options.
FAQs About Refinancing in Ghana
Q1: What credit score is needed to refinance in Ghana?
Most lenders will want a minimum score of 650-700, but 740+ is ideal to access the very best rates and terms when refinancing locally. Pay down debts and correct errors to boost your score prior to applying.
Q2: How much equity is required to be eligible for a cash-out refinance?
Lenders generally allow a maximum of 80% combined loan-to-value for a cash-out refi. This means you need at least 20% equity already in the home to qualify for this option.
Q3: Are there tax implications when refinancing a mortgage in Ghana?
Potentially yes – consult an accountant. You may lose some tax deductions for mortgage interest paid. Capital gains taxes may also apply later upon selling.
Q4: Can you switch mortgage companies when you refinance?
Yes, you can refinance with any lender and are not obligated to stay with your existing provider. Shop around for the best offers.
Q5: How long does it take to close on a refinanced mortgage?
The refinancing process typically takes 30-60 days from application to closing. Having paperwork and finances in order can help speed up the timeline.