Mortgage Refinancing (Refinansman) In Turkey

Mortgage Refinancing (Refinansman) In Turkey

By: Berk Akman

The interest rates in Turkey have been falling in the last one year and more and more people are interested in refinancing their mortgages. With lower interest rates, refinancing mortgage loan can lower down monthly payments significantly. In addition it is possible to change the structure of the mortgage by changing the duration, currency, and interest rate type. Below we go over advantages of the refinancing and important factors that should be considered in a refinance decision in Turkey.

Lower Interest Rates In Turkey, interest rates have been falling in the last one year. About one year ago in November 2006, the average monthly mortgage interest rates was about 1.8 percent, which decreased to 1.6 percent in early 2007 before the mortgage law passed on March 2007 and currently it is about 1.3 percent. Such a sharp decrease in the monthly interest rate clearly makes refinancing a very beneficial decision. To demonstrate the gains from the refinancing, consider a 10-year loan of 100,000 YTL. A drop of interest rate from 1.6 percent to 1.3 percent reduces your monthly payments by 12 percent (from 1,880 YTL to 1,650 YTL). Over the remaining length of the loan, the difference between two loans makes 27,543 YTL, which is about 27 percent of the original loan.

Fees In the above example, fees are assumed to be zero; however, it is very important to know the closing fees, lender fees, and other third party fees. Since increased costs decrease the benefits received from lower interest rates. However, the benefits gained because of the decrease in the interest rates in the last one year would be typically more than the costs incurred from the fees. For example, the basic calculation above assumed that fees for closing the loan and getting the new loan are zero. To be more realistic, suppose that the early payment penalty of 2 percent is applied to close the original mortgage. Also assume that an additional 3 percent is paid for the new mortgage. With these fees included in the loan, your monthly payment would be 1,732 YTL, still a 8 percent reduction in the monthly payments compared to the 1,880 YTL with the original loan. Over the length of the loan, the total gain from the refinance would be 17,641 YTL, still a significant gain for a loan of 100,000 YTL over 10 years.

No Early Payment Penalty if… The mortgage law that passed on March 2007 introduced up to 2 percent early payment fee for fixed-rate mortgages if they are paid before the due date. However, if you got your mortgage before March 6, 2007, you would be exempt from the 2 percent early payment fee. So in the above example, without the 2 percent early payment fee your monthly gain would be 1,700 YTL and your total gains would be 21,602 YTL. Let's also note that early payment fee is only valid for fixed-rate mortgages but there is no penalty fee for adjustable rate mortgages.

Refinance in Foreign Currency with Lower Interest Rates Refinancing can be a chance to change the currency of the loan. In Turkey, the interest rates for mortgages borrowed in Turkish Lira (YTL) are significantly higher than those borrowed in foreign currencies such as Euro, US Dollar or Japanese Yen. On the other hand, the risk of borrowing in foreign currency is also high. Earlier financial crises have always ended up with sharp depreciation of the Turkish Lira. For example, in 2001 the Turkish Lira depreciated more than 50 percent in only a few days. Given the large current account deficit of Turkey, about 7 percent of the GDP and the largest deficit for an emerging country, we believe that the probability of Lira's depreciation in the next 10 years is also very high. So possibility of such a crisis in the future should be included in the risk analysis. Briefly, as a rule of thumb, borrowing in foreign currency may be advantageous if your income is in foreign currency or if the length of the loan is only a few years. What if the interest rates continue to fall? If you expect the interest rates and inflation to continue to fall in the future, the best strategy could be changing the fixed-rate mortgage to an adjustable-rate mortgage. This way, your mortgage interest rates will continue to fall if inflation falls in the future. In addition, re-refinancing the fixed-rate mortgage would be more costly in the future because of the 2 percent early repayment fee if you want to re-refinance when interest rates get even lower in the future. On the other hand, there is no early payment fee for the adjustable rate mortgages. We should also stress that an economic crisis that result with a depreciation of the Turkish Lira would also increase the inflation. Since inflation is the base index for the adjustable rate mortgages in Turkey, your interest rate and monthly payments may increase sharply with adjustable rate mortgages. So we suggest being very careful before switching to an adjustable rate mortgage for long loan terms.

Decreasing the loan term By refinancing, you can change the duration of payment: you may decrease it or extend it. If you refinance with a shorter loan term, you can pay off your loan faster and therefore build up equity in your home faster. Especially, in Turkey, since the interest rates are higher than the ones in developed countries, the optimal length of the mortgage is shorter than the developed countries. A mortgage with a loan term longer than 10 years is currently too costly and you may use the refinancing as a chance to reduce the duration. As an example, if we go back to our example with 10 years mortgage of 100,000 YTL with 2 percent closing and 3 percent opening costs and if we decrease the mortgage length to 9 years from 10 years, monthly payment decreases 3 percent to 1,815YTL (from 1,880 YTL) and the total gains increase to 29,580YTL (it was 17,641YTL with 10 years refinancing). So it is suggested that you refinance with a shorter loan term if possible.

Extending the loan term Refinancing is also one of the best ways to acquire funds which may be used with any purpose, including the opportunity to pay off other debts. If the duration of the loan is extended a few years, somewhat more funds would be available, however, as stated earlier, the interest rates are high in Turkey and therefore gains from extending the length of the loans may not be very high in long term loans. For example, going back to our example of 10 years mortgage of 100,000 YTL with fees, if new duration with refinancing is extended to 11 years, the monthly payment decreases to $211 YTL, reducing the monthly payment by an additional 65 YTL (from 1,733 YTL) when compared with the 10 year refinancing.

Compare APRs Remember that a wrong decision in mortgage refinancing can take years to recover from. Before making any decision on refinancing, you should compare all lenders in Turkey properly. In comparison, make sure that you use the Annual Percentage Rate (APR), which is the annual rate inclusive of fees on the mortgage. Kredihavuzu.com has all the tools you may need for such a comparison including all the up-to-date interest rate and fee information for all the lenders in Turkey.

Berk Akman works at KrediHavuzu.com, Turkey's leading online mortgage (ucuz, hesapli konut, ev, arsa, is yeri, refinansman kredisi) broker dedicated in providing interest rate, fee information and various advanced mortgage calculators (e.g., refinansman (kredi yeniden yapilandirma) bul ).

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