Whether you are looking to gain from the current low home loan interest rate compared to your existing housing loan or for your short-term cash needs, refinancing your mortgage may be the answer to these needs. However, as much as refinancing your mortgage has a lot of benefits, there are risks involved with refinancing too whereby it can hurt you more than it help you. For this very reason, we've compiled a short guide to help you explain how does a housing loan refinancing works, and what do you need to know before taking any action.

To put it simply, a home loan refinancing is when you take out a new loan to replace the existing loan. Mortgage refinancing allows you to obtain different interest, change to different banks and even taking cash out for your own personal consumption.

There are 3 types of home loan refinancing: 

1) Changing from one bank to the other

2) Top up loan

3) Transferring from one family member to the other

Mortgage Refinancing effectively means taking out a new loan so you will need to go through the same process when you take out a housing loan. How much you can borrow on this new loan depends on your individual circumstances (e.g. your latest ability to repay, other existing loan commitments), as well as the terms offered by the lender.

Once your new loan application has been successfully approved and accepted, your home loan interest rate will be adjusted to reflect the new rates. Your lock-in period will also start fresh and the duration will be according to the new lock-in period (if any). If you intend to refinance your mortgage, your home will need to be revalued again.

Then, you will decide on the margin of financing that you are interested to get, and the banks will give approval on what they are comfortable to give.

Next, the balance owed on the original amount is paid off before finally, loaning the remaining amount to the owner.

With Malaysia's Base Lending Rate (BLR) currently at a 10 year low, it is a good time to consider refinancing. Refinancing your home at a lower interest rate can help reduce your monthly repayment amounts. Just be sure to check if your home loan is subject to any lock-in periods or early repayment penalties. Refinancing also involves other legal costs and fees.

If the value of your home has increased in the past few years, it can be a good time to refinance. Rising home prices means you are able to top-up your loan amount and get extra cash which you can use for investments, renovation or paying off other debts.

Advantages: Refinancing your mortgage can help you to reduce interest if the new interest rate offered by the bank is lower than when you took out the loan. By replacing your existing loan with this new loan, your monthly instalments can be reduced and you will save more on interest.

Risks: If you choose to refinance your house loan, you can incur penalty from your existing loan especially so if you are still within the lock-in period of the loan. The penalty charged is usually 2% -3% of your loan amount. Besides that, if the new interest rate is higher than the old interest rate, you might even end up paying more in monthly instalment. Finally, there are fees from refinancing your housing loan such as stamp duty, legal fee and valuation fee, just to name a few.

Note: In order to determine whether you should refinance your loan, make sure to pay extra attention to the interest rate and lock-in period of both your existing loan and your new loan.

Early Settlement Penalty: Some mortgage lenders may apply an early settlement penalty if the loan is paid off in part or in full within a specified time period, including if you refinance the loan with another lender. This specified time period when you are liable to pay an early settlement penalty is called the "lock-in period". Depending on the term and size of your home loan, this charge can be quite significant.

Home Loan Fees & Charges: There are a number of related costs (such as professional fees and government charges) that you would have to pay when you take out a home loan. Some common fees and charges you would expect to incur include:

Stamp Duties: Sales & Purchase Agreement (0.5% to 1.0%), Loan Agreement (0.5%) and Transfer of Title (1.0% to 2.0%)

Disbursement Fees: Varies by state, land office and type of property

Valuation Fees: Depending on the value of the property