Refinancing

You have a mortgage with bank A. Bank B offers you a better rate. Refinancing means taking a loan with bank B, which immediately pays off what you still owe bank A and from then on you repay only bank B.

Neither the property nor the debt has gone anywhere. Only the lender and the terms have changed.

Why people do it

Most often for a lower interest rate. Over years of repayment the market changes, or your own position improves: a higher income, other loans repaid, a lower ratio of debt to the property's value. Bank B then sees less risk and gives a better price.

The other reasons tend to be practical: merging several loans into one, changing the term, getting better terms for overpayments.

Timing is crucial. The best moment to refinance is at the end of a fixed period, when leaving carries no penalty. Outside that window the bank may charge you a fee for early repayment.

Where the catch is

A lower monthly instalment does not automatically mean a cheaper loan. That is the most important sentence in this entry.

There are two ways to cut an instalment: a lower rate, or a longer term. The first saves you money. The second costs you: you repay the debt more slowly, so you pay interest on a higher balance for longer.

The same offer, two terms

You have €120,000 left to repay, you are on 4.5% with bank A and have 20 years ahead of you. Bank B offers 3.5%.

Option	Instalment	Total interest
Stay with A: 4.5%, 20 years	€759.18	€62,203
Move to B: 3.5%, 20 years	€695.95	€47,028
Move to B: 3.5%, 30 years	€538.85	€73,987

The third option has the lowest instalment: €220 less a month. And it is at the same time the most expensive of all: you pay €11,784 more in interest than if you had done nothing at all.

The genuine saving is the second option: the same term, a better rate, €15,175 less in interest.

Why it matters

On a mortgage even a small difference in rate runs into thousands of euro, because it acts on a large principal over many years. Refinancing is one of the few steps that can really change that price.

It is not free, either. Expect the cost of a new valuation, land registry fees, possibly insurance, and an early repayment penalty if you leave outside the end of a fixed period. Those are usually hundreds of euro: with a large saving they are recovered quickly, with a small difference in rate they may never be.

What to watch out for

Compare the total amount paid, not the monthly instalment. If you keep the original term, the comparison is honest. The moment you extend it, the monthly figures mislead.

Count the cost of moving. Divide it by the monthly saving and you get the number of months in which refinancing pays for itself. If that is longer than the time to the end of the new fixed period, there is no point.

Beware conditional discounts. A lower rate is often tied to an active account, your salary being paid into it, or insurance. Stop meeting the condition and the rate goes up.

Try it yourself

In the mortgage calculator compare your current offer with the new one over the same term: only then will you see the real difference. In the early repayment calculator you can work out the alternative: leave the loan as it is and send in the extra you would have saved on the instalment.