Are you loyal to your bank? If the answer is yes, then I have bad news: stupidity is at least 50% genetic. Otherwise, congratulations. The world of refinancing is open to you. Now you can respond to the banks’ mercenary attitude with one of your own. Before you start swapping home loans though, ask yourself:
1. In the Long Run, Will You Lose More Than You Save?
There are two things to look at here.
First you need to find a break-even point. This is when savings from your new loan are enough to recoup the refinancing costs. So check how much you’ll pay at the end of the new package, versus your current package. After that, work out if the refinancing costs would exceed that.
If you don’t want to crunch the numbers, just get one of our mortgage specialists to crunch the numbers for you. (It’s free, so let that indicate how quickly a degree in banking will make you rich).
Second, check out the “thereafter” rates on the new loan package. It might be worse than your current loan rates, after two or three years. This might not be a problem if you’re selling soon (see #3), but it does make the new package a bad idea in a long run.
2. Would It Be Cheaper Just to Reprice Your Loan?
Repricing is not the same as refinancing. Refinancing means switching banks altogether, whereas repricing just means switching to a cheaper loan within the same bank. Sometimes, a repricing option is indirectly cheaper than a new loan package.
Say a repricing option lowers your interest to 1.5%, whereas a new loan package would lower it to 1.3%.
Ordinarily, the new package would be cheaper. But if your bank has a free repricing option, you can switch to the 1.5% interest without paying refinancing costs. Overall, that could save you more money than refinancing.
3. How Much Longer Do You Want to Hold on to That House?
If you’re intending to sell the property soon, you might want to constantly refinance into cheaper packages. You don’t really care about long term “thereafter” rates, because the house will be sold by then.
If you’re intending to stay in a house for a long time – which is the case for most owner occupiers – then don’t be too quick to swap. If you have a loan with a good “thereafter” rate, don’t give it up for a package that’s only cheaper for a few years.
4. How Hard Will Your Current Bank Kick Your Ass?
Check if your current home loan package has a lock-in clause. You’ll have to call your bank if you’re not sure.
It is never worth refinancing when you’re in a lock-in. The penalty is usually a percentage of the outstanding loan, but take our word for it: you will lose way more money than you could possibly save.
This is the drawback to home loans with very long fixed rates (e.g. five years or even eight years). For as long as you’re paying a fixed rate, it’s assumed that you’re also locked in. So if a cheaper home loan comes along, all you can do is seethe in impotent rage.
5. Are You Prepared to Pay the Refinancing Costs?
Refinancing costs are around $1,500 to $2,000. You can use your CPF to pay for this. But that isn’t the only cost.
When you refinance, you go through the whole process of loan application again. And because of cooling measures, it’s entirely possible that someone who qualified back in 2012 won’t get the loan in 2014.
You’ll have to spend some time clearing up outstanding loans (to meet debt servicing ratios), and doing a ton of paperwork. If you want to know how to speed it up, just follow us on Facebook; we’ll tell you about it soon.
What stops you from refinancing? Too troublesome? New loan restrictions? Have no idea what we’re talking about? Comment and let us know!