Refinancing your home loan can be a great idea if you’re looking for a way to save more money and make paying your monthly bills easier. This means you’ll be paying off your existing mortgage with a new loan, whether with your current bank or a different one.
Although, in theory, refinancing your home loan sounds like the perfect financial planning decision to increase your saving capacity, there's more to it than this.
Today, we’ll go over everything you have to know about refinancing loans in Singapore to help you make a more informed financial decision. Let’s start with what refinancing actually means.
What is refinancing?
Refinancing is when you get a new loan to pay off an existing loan or mortgage for a lower interest rate.
The rule of thumb is that refinancing is the best option if you want to lower your interest rate by at least 2%. However, some experts say that 1% is already a good deal. It’s usually done after hitting the 4th year of your mortgage as loan companies and banks tend to raise their interest rates after the third year.
Apart from helping you save more money, refinancing your home loan can increase the rate at which you build equity in your home. If you’re consistently paying off your mortgage, the amount of equity in your home will increase.
Another reason why homeowners in Singapore refinance their mortgage is the changes in the SOR and SIBOR rates.
With the current state of the global economy inflation rates, it’s predicted that SOR and SIBOR rates will increase soon. You’ll want to switch to a lower interest rate loan as early as now to avoid having to pay higher fees.
When should I refinance?
Although refinancing is a good option for most cases, it’s not the right path for everyone. Whatever your reasons for refinancing are, make sure to consider the closing fees and penalties that come with refinancing.
These can include the origination fee, appraisal fee, title insurance fee and credit report fee. It’s worth asking yourself if you’re willing to and can shoulder all these fees at the moment.
In terms of timing, technically, you can refinance your mortgage anytime, but we recommend waiting for the end of your lock-in period before jumping ship. Otherwise, you’ll be slapped with different types of penalty fees, usually amounting to 1.5% of your total loan.
The good news is that you can start the process of refinancing your mortgage even before your lock-in period ends. Since banks have 2-3 years of lock-in period, take note of when your bank will increase your interest rates and work backwards from there.
You’ll need at least 4 months before the lock-in period expires to start the process of refinancing your loan to avoid paying higher interest rates, from informing your current bank to applying to your new bank.
Is there any cost to refinancing?
We’ve already mentioned that refinancing a mortgage comes with legal fees and all sorts of penalties depending on the bank. Fortunately, some of these costs can be subsidised by your bank under certain circumstances.
If your loan is of a substantial amount, some banks could be willing to defray the legal fees with subsidies, usually with loan amounts above $500,000.
Before anything else, though, make sure to read the terms and conditions of the legal subsidies carefully to avoid being in the position of having to settle for higher and more fees in the future.
Some come with a “clawback period” clause wherein you have to stick with the bank before refinancing with the help of another bank.
In simpler terms, with a new loan comes a new lock-in period. If you leave the bank before the lock-in period expires, the bank will seize the freebies and perks given to you.
The other option: repricing
Repricing is when you stay with the same bank but switch to another loan package in hopes of getting more competitive interest rates. It’s another option you can consider if you don’t want to end up paying higher interest rates once the lock-in period ends.
Compared to refinancing, a shorter waiting time is involved when repricing, so you can switch to a package with a lower interest rate much sooner.
Although it comes with fewer fees, repricing isn’t always the cheaper option, especially if you have a mortgage with legal subsidies.
In most cases, repricing is only an attractive option for those with outstanding loan amounts lower than $200,000 since the cost of refinancing is more significant compared to the amount you can possibly save.
Just a friendly reminder here that banks care more about getting new customers than retaining existing ones, so you might get a more competitive interest rate when you choose to refinance.
Conclusion
Refinancing is a wise financial decision if it means lower mortgage payments and shortened loan tenures. When done correctly, it can not only help you bring your debt under control, but also help you save more in the long run as well.
Our tip before refinancing is to take a look at your financial situation and ask yourself how long you plan on living in your house.
If you want to learn more about refinancing or repricing loans or simply want some financial planning tips or help with CPF refunds, don’t hesitate to reach out to us. We can connect you with experienced financial advisors who can teach you smarter ways of dealing with loans.