Let refinancing boost your total financial plan

If you have ever bought a house or condominium unit, you have probably heard about refinancing. If you haven’t taken advantage of this useful financial tool, perhaps you need to consider that it can not only help you save on interest costs but let you build investment. 


When you refinance your home, it means you replace your existing mortgage with a new one that charges a lower interest rate. Often this becomes attractive after making payments on a mortgage for three years, since banks typically charge a fixed low interest rate during this period, after which it becomes a variable interest rate, also known as floating rate, based on the official minimum lending rate. This is likely to impose a higher cost burden.


To reduce your interest rate and monthly installment, you can contact a new bank for a refinancing.  Transferring your loan to a different bank can help you get an annual interest rate that is 1 or 2 percentage points lower. If, for example, you still owe 5,000,000 baht on your loan, and refinancing saves you 2% per year, then you’ll save costs of 100,000 baht a year or 8,333 baht per month.


It’s helpful to think of this savings as a surplus that can and should be invested. Then it can help you develop a nest egg for future spending or retirement. Here are four tips:

1. Invest in RMFs to strengthen your retirement plan

Since you’ll accumulate the refinancing savings over a long period of time, it makes sense to put this money into a variety of different investment vehicles to reduce risk and increase returns. One long-term investment that offers the potential for high returns is a retirement mutual fund, or RMF.

 RMFs offer not only a wide choice of different investment approaches but also tax savings. You can deduct RMF investments up to a level of 15% of your total income or 500,000 baht. If you refinance, then invest in some RMFs, you can reduce both your loan costs and taxes while also generating handsome long-term returns. It’s a win-win-win.


2. Invest in LTFs for higher profits

You could also consider investing in one or more long-term equity funds (LTFs).  Like RMFs, they offer tax advantages and the opportunity for investment gains. The difference is that the level of risk is generally higher because LTFs focus on equities. However, LTFs allow you to take profits on a relatively short-term investment, if wanted.


3. Use cost-averaging to invest in stocks or mutual funds

The basic rule of investment is buy low, sell high. But this takes skill and luck each time.  One easy technique for stacking the odds in your favor over the long term is called dollar cost average (DCA) investing.


The idea is to commit to investing regularly in shares or funds regardless of whether the price at the moment is higher or low. What counts over time is the weighted average price per share. Since share prices tend to rise over time, you will profit even without “buying low” each and every time you invest.  This method is intended to help ensure success over long periods – years or decades rather than months.


4. Insure against mishap

When you apply for a home loan, the bank may require you to purchase enough life insurance to cover the credit. This will ensure that the debt is repaid in case of your untimely passing.


But life insurance might not be enough. You also need to be protected against the burden of medical costs. This is especially important if you are not enrolled in a government or corporate healthcare program, since you’ll then need to bear these costs yourself.


Insurance is thus another smart way to invest your savings from a lower-cost mortgage. Increasing your life and health protection makes sense, because medical costs are rising fast, particularly for serious illness. Unexpected healthcare costs might force you to sell your home if you and family members are not well covered.  Since you’ll put long, hard effort into paying for a home, you’ll want to own it for your entire life. For this reason, it makes sense to include insurance as part of your financial planning.


All in all, refinancing is one of the best ways to improve management of your personal finances.  What’s smart is to use the benefit of a lower-cost mortgage to gain additional financial benefits through wise investing.