Refinancing Your Home Loan

Refinancing Your Home Loan

Ups and downs, good times and bad. These are part and parcel of life. Similarly, highs and lows are depictive of home loan rates in Singapore. When you take out a housing loan to finance your property purchase, homeowners often enjoy good home loan rates for the first three years. Thereafter, interest rates may surge. It is therefore in homeowners’ interest to refinance their home loan in their fourth year.

What is Refinancing?

Refinancing is the decision to ‘jump ship’ – to switch your home loan package to one that offers a lower interest rate by moving to a different bank altogether.

As financially savvy individuals, homeowners are constantly keeping watch of the fluctuating home loan interest rates in Singapore, in a bid to catch the opportune moment to refinance. Refinancing grants a terrific opportunity to reap substantial savings as homeowners can decrease their monthly home loan repayments. Homeowners can also stretch their loan tenure or change the type of mortgage rates they wish to take up. The options are aplenty.

The Benefits Gained

Here’s a simple example. Imagine, your outstanding loan amount is $350,000 and your remaining loan tenure is 22 years. Your current bank (bank A) is offering you an interest rate of 2.02%, but another bank (bank B) is having a special promotion that offers borrowers an interest rate of 1.85%. By refinancing from bank A to bank B, you get to save:

 

Bank ABank B
Interest Rate2.30%1.85%
Monthly Home Loan Repayment$1690.58$1614.81
Monthly Savings$1690.58 – $1614.81 = $75.77

 

$75.77 may appear to be a trivial sum, but multiply it by 12 months and it will be $909.24, multiply it by 3 years and it will be $2727.72. How many bundles of 3 years does your mortgage cycle have? How much savings will you gain? Evidently, refinancing your home loan periodically is a smart move.

The Costs Involved

Sad to say, life can’t be all rainbows and unicorns, and the same applies to refinancing your home loan, which is why apart from the savings reaped, certain costs are included too. For the most part, homeowners are due to pay legal fees and valuation fees. The good news is you may not have to pay these charges if you have a large loan size and the bank that is trying to pull you over is willing to cover these costs (up to a certain amount) to make their package a little more attractive for their potential customer.

Nonetheless, even though us kiasu Singaporeans take a fancy to free stuff, gifts and discounts, having the banks fork out money for you is definitely not an offer that comes with no strings attached. Typically, banks will set a ‘clawback period’ – which means that your home loan package has to stay with that particular bank for a stipulated period before you can refinance and switch to another bank. Otherwise, a penalty fee will be imposed.

When should I Refinance my Home Loan?

Speaking of penalty fees, this brings me to my next point. When should homeowners refinance their home loans? The answer is after the lock-in period. Because the lock-in period is a specific period of time that a borrower has committed to the bank for his/her mortgage loan, if you were to refinance during your lock-in period, a penalty fee (usually 1.5% of your outstanding loan amount) is chargeable.

What about Repricing? Is it the same as Refinancing?

Nope, repricing is an alternative to refinancing. Repricing involves switching your home loan package to a cheaper one within your existing bank. As it’s the same bank, the processing time is shorter and no legal fees and/or valuation fees are payable. However, since someone has got to do the paperwork for you, administrative charges still apply.

Unfortunately, not many homeowners opt for repricing owing to the fact that banks employ the approach of offering good home loan packages for new customers instead of the ones that have been staying with them for long. Perhaps this is why many Singaporeans claim that it does not pay to be loyal to your bank when it comes to your home loan package.

Conclusion

Refinancing is an important financial tool that every homeowner should be utilising. Nonetheless, it is important to note that when you refinance, you are starting your home loan application from scratch. The government’s introduction of new cooling measures may affect your loan eligibility, including TDSR and MSR. If you are worried about the lengthy calculations or cumbersome paperwork involved, our mortgage specialists can help you through the entire refinancing process. Contact us @ 98 90 90 90 or drop us an email at [email protected] today.