Term
Refinancing
Repaying an existing loan with a new one, usually at a lower rate or over a longer term. The debt does not disappear: the lender and the terms change, and only the sum of all the fees shows whether it pays.
Updated
What it means
Refinancing means repaying an existing loan with a new one, usually cheaper or longer. The debt does not disappear: what changes is the lender, the price of money and the repayment schedule, not the amount owed.
It is not consolidation, which merges several loans into one, nor a payment holiday. On a mortgage it is usually done towards the end of the interest rate fixation, when the bank quotes the rate for the next period.
In the narrow sense it is a new contract, often with another bank. If the same bank merely cuts the rate or extends the term by an amendment, the existing loan is being changed: a new valuation and the deletion of the lien are usually not needed, but neither is there the competitive pressure that pushes the rate down most when another bank is bidding.
How it works in practice
Total cost decides, not the headline rate. The early repayment fee, a fresh valuation, the land registry filing fee and the reassignment of the insurance all belong in the sum, which is why the APRC is compared.
The new bank wants a first-ranking lien and the old one is deleted only after repayment, so it charges more until the entry is made. On corporate loans the covenants in the other agreements need reading first.
When a company refinances, we prepare the financial statements and the balance of the old loan at the repayment date for the new bank. In the books, repaying the old loan and drawing the new one are two separate movements, the fees go to expenses, and the debt is split into its short-term and long-term parts according to the new repayment schedule.
What to watch out for
With a short remaining term refinancing does not pay. An early repayment fee incurred away from the end of the fixation, the valuer and the land registry eat the interest saving before it ever shows up in the instalment.
A longer term lowers the monthly instalment, but the total interest paid often rises. A company that spreads a working capital loan over many years this way keeps paying interest long after the money went on stock or wages, and has less room with any bank the next time it needs funding.
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