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Refinancing — when the term of your mortgage is reached
What is refinancing? The definition
refinancing means the process of raising money to service existing liabilities or to provide additional funding for lending. In the banking sector, refinancing is a central term that secures liquidity in order to finance credit transactions. For property owners, refinancing describes the extension of existing credit agreements, for example through debt restructuring or follow-up financing.
Refinancing for female mortgage borrowers
After the term of your mortgage is reached, you have two options: repay the remaining debt, or refinance. The term refinancing here is therefore the simple replacement for the expiring loan. This can be done with the same mortgage provider or with another.
Refinancing in the banking sector
One of the main tasks of banks is to grant loans, which in turn requires sufficient liquidity. To ensure this, banks use various sources of refinancing:
- Customers' savings: The bank uses deposits, such as current accounts, overnight deposits and fixed-term deposits. Long-term deposits offer the greatest planning security.
- Sale of receivables: Banks sell bundles of customer loans to investors in order to gain liquidity. This method is often used when financing is needed in the short term.
- Borrowing from the Swiss National Bank (SNB): In the event of short-term liquidity bottlenecks, banks can borrow from the SNB but must deposit collateral to do so.
- Borrowing on the interbank or capital market: Banks can lend funds to each other. However, this depends on your credit rating and there are interest rates that influence refinancing costs.
Example: Follow-up financing for a single-family home
Suppose that a family refinances their mortgage loan after the five-year fixed interest rate has expired and opts for a new bank with a term of ten years due to better conditions. Here, the new bank refinances the outstanding loan amount and uses its clients' savings deposits, for example, to loan the amount on over ten years at a fixed interest rate.
Early refinancing
Borrowers, whether companies or private individuals, may consider early refinancing under certain conditions. If the agreed credit terms are higher than the current market interest rate, early rescheduling may make sense. However, there are often fees that must be weighed against potential savings.