With 2020 being a year of extremely low interest rates and banks and other financial institutions in Singapore competing to offer the best home loan packages to customers, there's no better time to consider refinancing your home loan. However, if you don't know what it means to refinance, or how to refinance your mortgage, then it'll be good to take a few minutes to read on.
What exactly does refinancing mean?
Refinancing in Singapore refers to getting a new home loan from another financial institution to pay off your current home loan. Refinancing will often get you a lower interest rate, thus saving you money in the long run. With such a competitive mortgage industry in Singapore, refinancing should be done as often as possible, to ensure that you always enjoy the best and lowest interest rates on the market.
Why should you refinance?
If you took your loan before 2018, you should be paying around 2.40% or more on your home loan. That’s really high by today’s standards, where even fixed rate home loans are as low as 1.50%! Refinancing now will save you a significant sum of money.
For example, assume there’s still $500,000 outstanding on your loan, with 20 years left. You’re currently paying 2.40%, so your monthly instalment is about $2,625, or $31,500 a year.
By refinancing to a 1.50% home loan package, you will only pay $2,412 a month! That's $213 less you have to pay each month, or $2,556 less a year!
Imagine how much you could be saving if you're currently on an HDB loan of 2.60% and you refinance to a bank loan! And yes, before you ask, you CAN refinance your HDB loan to a bank loan! However, you cannot refinance a bank loan to an HDB loan.
When should you refinance?
The best time to refinance is every two to three years, but this depends on the home loan package you have. Most home loan packages in Singapore increase the interest rates in the third year, after the lock-in period. However, you don’t need to wait for the lock-in period to end before you start your refinancing journey!
You should refinance when there’s six months left on your lock-in period!
A common misconception is that you cannot enjoy the best home loan packages while you’re still in your lock-in period. However, you can refinance and lock in your preferred home loan package rates for up to six months! If there’s a really good refinancing package being offered now, you should not wait for your lock-in period to end and risk losing it.
Currently in Singapore, a refinancing contract will only kick in 3 months after you sign it. This is because you have to serve a 3-month notice before you can refinance. However, as experienced mortgage brokers, we know that several banks are willing to lock in their rates for up to 6 months for our customers!
At Mortgage Master, we make it a point to check in with our existing clients when there's about 4 to 6 months before their lock-in period ends. Why? So there's enough time to lock-in the rate with the new bank, get our conveyancing lawyer partners to serve notice to the old bank and then sign the new bank contract so that it will kick in exactly 3 months later.
What happens when you refinance?
Since refinancing involves one financial insitution taking over your home loan from another financial institution, there will be several steps involved. The bank you're refinancing with will typically do a credit check, such as asking for your payslips and finding out your current financial commitments. They will also need to do a check on your property's valuation, which will incur some costs (we'll talk about them below).
All these steps will require the assistance of a conveyancing lawyer, usually one that is already on the bank's panel of conveyancing law firms.
What else can you gain when you refinance?
In addition to saving you money in the long run, refinancing also allows you to enjoy the benefits offered by another bank's home loan package. For example, some banks offer a waiver of penalty due to sale. This means that you can refinance and not worry about when you want to sell your propery.
What happens when you refinance your home loan with the same bank?
Refinancing with the same bank is known as repricing. The upfront costs (again, we'll talk about them later) will be lower, but the rates aren't always as good as what other banks are offering. Just like not every banker will admit that you can get better rates from another bank, not every mortgage broker will reveal if you can get a better rate by repricing.
When is refinancing a bad idea?
Refinancing your home loan is only a bad idea if you are one of the following rare cases:
1. You are already enjoying one of the best home loan packages available
If you are one of the adventurous types who signed up for a floating rate package while SIBOR was still high, you may be enjoying one of the lowest interest rates now! This is because your SIBOR home loan package probably has a REALLY low spread, such as 1M SIBOR + 0.25%. If you’re enjoying a spread as low as 0.25%, you definitely won’t need to refinance anytime soon!
2. You can enjoy a lower repricing rate
Repricing is like refinancing, except that you are staying with the same bank. The bank basically offers you a lower interest rate to ensure that you don’t switch to another bank or financial institution. Like the Biblical story of the Judgment of King Solomon, who ruled in favour of a woman who would give up her child to save its life, the bank would rather reduce their profits than lose you altogether.
What are the costs of refinancing?
Depending on whether you are refinancing from an HDB loan, or another bank, you will face different upfront costs:
1. Early redemption penalties and fees
If you took a loan from HDB, then there are no early redemption penalties and fees. If you took a loan from a bank, the fees vary from bank to bank. It’s important to check if the potential interest savings are higher than the costs involved in switching over.
2. Legal and valuation fees for refinancing
The bank you refinance to will charge legal fees and valuation fees charged by the bank. These are standard costs, so some banks offer cash rebates to offset the legal and valuation fees involved in refinancing.
Fortunately, if your outstanding loan amount is higher than a specific amount ($300,000 for HDB and $400,000 for private properties), banks will provide full legal subsidies. Some banks will even go ahead to subsidise part of your valuation fee! This is why we normally don't recommend refinancing if you have $100,000 or less outstanding on your home loan - the long-term savings often don't cover the upfront costs.
Ultimately, do consult a mortgage broker first!
Instead of getting lost reading the fine print of any mortgage package you are considering, or wasting hours calculating and comparing all available loan packages, trust a mortgage broker to handle this for you.
Think about it like this - you wouldn't just take a random dish off a sushi restaurant's conveyor belt without knowing what it was. Even for the most adventurous among us, your housing loan is arguably one of the biggest financial commitments you will ever make in your life. Refinancing is like the fugu sashimi that you should be careful about picking up - it's poisonous unless you're sure that you're being served by only the most professional.
It is the job of a professional mortgage broker to advise you about your options when it comes to home loans in Singapore. At Mortgage Master, based on our years of experience in the industry, we know best which home loan packages are suitable for your financial situation, and whether they can save you money in the long run.