Home loan refinancing is one of those things that people know they should look into but as with many important things but less ‘urgent’ things in life, it often gets lost in the hum of everyday life.
This is especially so since our mortgages have been in place for some time, usually for a few years, and the amounts are deducted directly from our bank accounts. We have grown immune to the statements sent monthly, doing little with them besides filing them away.
However, by the time you spot a noticeable increase in the amounts you are paying monthly, and get round to doing something about it, it is often too late as you are likely to continue incurring those higher payments while clauses like ‘notice period’ kick in.
These are 3 tips on when and how you can start looking into refinancing and factors you should consider. These will help you to make the process painless and put you in a favourable negotiating position and of course, potentially save you a tidy sum of money.
1. Set a google calendar or phone alarm 6 month before the end of your lock-in period.
Once you sign the Letter of Offer on a mortgage document, take note of the lock-in period, notice period required for refinancing, any clawback* period and the step-up increases in interest rates over the years.
The best way to deal with these jargon-filled terms is just to take a piece of paper, or your smartphone, and write the information down.
The lock-in period for floating rate loans is typically none, or 2, or 3 years. Take note of the definition of lock-in period in your Letter of Offer, whether it is from the date of the agreement, or the date of disbursement of the mortgage. It will typically be from the date of the agreement whether you are obtaining a mortgage for a property under construction or a completed property. Write down the date your lock-in period ends and highlight it for easy future reference.
The notice period is typically 3 months. This means that you have to give your current bank 3 months’ notice in writing before your mortgage can be effectively transferred to another bank, or refinanced. Deduce what this date is and write it down and highlight it as well .
*”The clawback period typically applies for all mortgages, so long as legal subsidies are given. It is typically for a period of 3 years. This means that you would have to reimburse your current financier for the legal costs, valuation fees and other costs which they have paid on your behalf should you refinance within the 3 years.Write down the date end of the clawback period and highlight it if it ends after the lock-in period, which is typically the case for mortgages offered nowadays.”
Typically floating rate packages look something like:
Year 1: 3month Sibor + 0.95%
Year 2: 3month Sibor + 0.95%
Year 3: 3month Sibor + 0.95%
Thereafter: 3 month Sibor + 1.25%
Year 1: 3 month Sibor + 0.85%
Year 2: 3 month Sibor + 0.95%
Year 3: 3 month Sibor + 1.05%
Thereafter: 3 month Sibor + 1.25%
The step-up increase in interest rates payable on your mortgage is usually noticeable after the first 3 years, which also coincides with the time a typical lock-in period ends.
Hence, it would be important set up an alert that will notify you 6 months before this happens. Since most of us re-contract our phone lines and get new handsets every 2 years or so, it would be good to set a google calendar alert instead since we are much more likely to stick to our emails and check them often.
2. Use a mortgage broker to simplify the process and get all the information you need
6 months before the lock-in or clawback period expires is a good time to start enquiring on the lowest and most suitable packages in town, and an efficient way to do it will be via a mortgage broker like Moneysmart. Simply key in a few details about your loan and you are minutes away from a comparison of the different available home loans in the market at the moment. Certainly beats going down to every single bank in town and getting pressured by sales tactics!
3. Consider between refinancing and re-pricing
Sometimes, the easiest way to get over the refinancing is to simply re-price your mortgage with your current bank. This makes sense after you have done your homework above and know what the ‘market rate’ is for mortgages.
If they are willing to match the best rates you have come across, it makes sense to re-price your mortgage with them as this will save you on the hassle of the legal paperwork and valuation process. Do note however that most banks charge a fee for re-pricing, typically $500-$800. You may try to request for a waiver of this fee if your outstanding loan amount is large.
For an explanation of the difference between refinancing and re-pricing, take a look at a simple explanation here.
Have you had any trouble refinancing your home loan recently? Share your experience with us here!
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Tags: Home Loans