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When Is The Right Time To Refinance Your Home Loan in Singapore
For a lot of households in Singapore, a home loan eats up a huge chunk of household income.
And because most people take up the maximum loan tenor they qualify for, it makes perfect sense to review the loan every 3 years at least.
A lot of home owners take up tenors stretching between 25 to 30 years. This is when “refinancing” will become words embedded in your mind.
Other than saving on interest charges, refinancing can also help you raise money for other investments that offer a greater return.
However, the timing of doing so can be as critical as getting low interest rates itself.
Firstly, what exactly is Refinancing?
Although refinancing might be a commonly known word for home owners, many are still unaware of this option at all.
Refinancing basically means taking your home loan to another bank.
If for example, you are are paying SIBOR + 2% from your current bank, you can potentially save thousands of dollars in interest charges over the years if you take your home loan to another bank that is offering SIBOR + 1%.
Since both banks are essentially selling you the same thing, wasting your money on high mortgage rates makes absolutely no logical sense at all. A dollar from a particular bank is the same as a dollar from another.
You might as well use the extra money you are spending on the current mortgage for a family holiday.
The Singapore property market is thriving and this has inevitably spilled over to the housing loan market as well.
It is very common to find property owners seeking better pastures elsewhere when they feel that they are being priced unfairly by their existing banks.
And since home loan packages change frequently, it has become so easy to find a better loan and refinance your home loan with another bank with very little hassle.
Refinancing And Repricing
Although the main objective of these 2 words are to lower your interest charges, they are different in definition.
To reprice your home loan, you are switching your home loan package and terms within the same bank.
So if you are currently paying SIBOR + 2%, you might be offered SIBOR + 1.5% by the same bank to stay with them, provided they have such a deal.
This actually happens more often than not.
When your lock in period for your home loan has expired and the market has prevailing lower interest rates, your bank will know that they have to act to keep you as a customer or there is a strong temptation to switch lenders.
So repricing your loan package to one with lower rates can just be the carrot to stop you from going to a competing bank.
In other countries, “repricing” may also be commonly termed as “remortgage”.
If you are lucky, your original mortgage might have terms that allow you to reprice within a specified period.
Take note that you might also be charged an administrative fee for repricing depending on the original terms and conditions that you have signed up for in the first place.
“Repricing” is also sometimes more affectionately called “conversion”.
Refinancing will mean that you take your mortgage to another bank.
A lot of times, you will find that refinancing is more worthwhile than repricing.
This is because a competitor may be willing to offer better deals to acquire your business.
Your property value has most likely increased since you first bought the property. And the new bank can also observe your repayment behavior over the years to judge whether you will be a good paymaster.
The are 3 key elements to look out for before refinancing. It’s not that difficult to understand them.
1) Your lock in period for the existing loan has expired
2) Your legal clawback period has expired
3) Other competing banks are giving you more favourable mortgage rates and terms
With unpredictable rate volatility in recent years, maybe refinancing to fixed rates can be reason enough to take action.
If you must indeed refinance your home loan within the lock in period and legal clawback, here are the penalty fees you can expect to fork out.
Lock-in redemption penalty fee
Most Singapore home loans have a lock-in period from 2 to 5 years.
If you are on a fixed rate mortgage, the lock in period will usually be for the years of fixed rates.
When you refinance your loan within this period, you will most probably incur a penalty fee of between 1%-1.5%. If you are on a multi-million dollar loan, you might just fall off your chair when you work out the fees that you will incur.
Although MAS has enforced Notice 632 which prevents banks to subsidies legal fees for mortgages, the mass majority of home owners will still have a legal clawback term in their existing home loans.
Subsidies from the bank can include legal fees, valuation fees, and fire insurance premiums. Maximum subsidies usually comes to around $2000-$3000.
The clawback period is standard across all banks at 3 years.
This means that if you redeem the loan within 3 years of the loan commencement, you will have to repay the subsidies they gave you in the first place. Commencement of the loan starts from the date of first disbursement.
But since Notice 632 has come into play, you will now have to pay legal fees out of your own packet without subsidies. The good thing is that you can arrange to use your CPF to pay for these fees.
So when exactly should I refinance?
Good thing you asked. The best time to do it is when these criteria are met:
- A better loan with better terms is available from another bank
- You either want to extend the loan tenor to make smaller monthly payments. Or decrease the tenor to save on interest charges
- Saving on interest charges exceed the closing cost of refinancing within 2 years or lesser.
1) A Better home loan is available from another bank
The mortgage market is very competitive and always changing. The banking industry is a very competitive market by itself. Every player is selling access to money. So players come up with great offers and packaged products frequently to outdo the other.
Even though you might have signed up for a loan years ago, you can bet that at some point in time, a better deal will become available in the market one way or another.
A common way for banks to package their loans is to offer very low interest rates in the initial few years of the loan. Like a teaser rate.
The rates will then significantly rise after a few years.
This is when you should typically consider refinancing and look out for better deals in the market. You will also most probably be out of your lock in and clawback period by this time.
How do I keep track of all these dynamically changing rates?
The most efficient way to keep track of all this madness is to get a mortgage broker to help you. These people make it their job to keep track off all available loan packages from all the different banks. A banker will most certainly promote loan from their banks only.
If you are on a loan of less than $300k, you want to look for interest savings of at least 0.9%. Otherwise it might not be worthwhile to refinance. However, for huge loans of $800k and over $1m, just a small difference in interest rates can mean huge savings over the years.
2) Changing the loan tenor
For some home owners, high monthly installments can put a strain on their financial positions. This is when you can consider refinancing to stretch out the tenor so as you will be making lower monthly repayments.
This is more of a cash flow issue than a costs issue.
Whereas if you have suddenly acquired a spike in personal income, you can reduce the loan tenor to make higher payments so that you will save on interest charges.
If you have obtained a sudden financial windfall, you might also consider paying off a portion of the loan to save on overall interest charges.
3) Savings is more than closing costs
It does not make sense at all to refinance your loan at a loss!
Use a proper housing loan calculator to work out your new monthly installments. Then compare the data with your existing repayments.
Take a look at the accumulated interest charges. A lower installment does not necessarily mean lower interest charges. The total amount of money that you will save has to exceed the closing cost of refinancing your existing mortgage.
Finally, if you have already decided to do it, remember to read the 10 steps to Singapore refinancing.