So you’ve just seen how much you’re paying this month on your home loan, and you’re seriously considering switching to another bank with the lower interest rates… Except you don’t know if refinancing is a good choice. Will it really be able to save you money in the long-term? Is the cost of refinancing really worth it? Here are some costs you will encounter when refinancing your home loan:
If you are still within your lock-in period: Prepayment penalty
If you’ve more than 6 months to go before the end of your lock-in aka the “commitment” period (as the banks would put it), refinancing would incur redemption fees of about 1.5% of your outstanding loan amount.
Imagine you’ve taken up a $500,000 mortgage loan, and you’ve paid up $200,000 of the principal, with $300,000 outstanding. Your lock-in penalty would be 1.5% of $300,000. That’s $4,500 if you repaid or refinanced during the lock-in period.
However, you shouldn’t wait till the lock-in period to end before starting the refinancing process. However, you need give your current bank at least 3 months notice.
Ideally, you should try to get a refinancing contract from your new bank when there’s less than 6 months left in your lock-in period with your current bank. This is because the contract signed with your new bank is effective for 6 months, and with home loan interest rates rising, you’ll want to lock in a good rate early.
Anyway, by the time all the processing has been done, your lock-in period would’ve ended.
If your loan is not fully disbursed: Cancellation fees
If the bank has not fully disbursed your loan amount for a new housing development since the building has yet to obtain its Certificate of Statutory Completion, or CSC, make sure you know the cost of refinancing.
Just like there’s a penalty for prematurely cancelling all contracts, a mortgage loan is no exception. If you want to refinance before the CSC, you’ll need to pay a cancellation fee. This is usually 0.75% to 1.5% of the amount that hasn’t been disbursed yet.
Say you’ve taken up a $500,000 mortgage loan to purchase a new condominium unit worth $1 million. The building has just obtained the Temporary Occupation Permit, or TOP, so the bank has yet to disburse the remaining 15% of the purchase price ($150,000).
You decide to cancel and pay up the remaining owed amount yourself. Assuming the bank charges a 1.5% loan cancellation fee, you’ll have to pay $2,250 (0.15 X 0.015 X $1mil).
The good news is if your property is a completed property when you bought it, the loan from the bank would be disburse at one shot lah. So unless you’re buying a new development, a cancellation fee won’t apply to you.
If your loan is below $300,000 (HDB) or $500,000 (private) when you refinance: Legal charges
When you first took up your mortgage loan, there were legal charges due to the paperwork involved.
Now, when you refinance, the new bank has to go through the same paperwork again. Hence, you’ll get slapped with a new set of legal charges.
These charges can range anywhere between $1,800 for HDBs, to $3,000 for private properties.
The MAS has implemented new regulations in 2012 to make it more difficult for banks to provide any form of subsidy for residential property loans.
However, banks still do give subsidies for legal charges incurred in refinancing cases. If your loan amount is above $300,000 (for HDB) or $500,000 (for private property), your new bank would subsidize approximately $1,800 and $2,000 respectively.
If your loan amount is below the aforementioned figures, you may receive less subsidies, or in the worst case, nothing at all.
However, don’t rejoice just because you’ve received a legal subsidy…
If you’ve been given a legal subsidy by your current bank: Clawback fees
If you took up your mortgage loan before MAS’s rules were implemented in 2012, or you’ve refinanced with your current bank previously and they gave you a legal subsidy, your contract has what is known as a “clawback period”. (Note that this is separate from the lock-in period.)
Think of this as a temporary guarantee you’ve given to the bank that you’ll stay with them since they’ve helped you offset your legal charges.
Clawback periods are usually 3 years long. Like the lock-in period, if you do not fulfill the bank’s clawback period, you’ll have to pay them back whatever’s they’ve subsidized you.
For all cases: Valuation fees
When you refinance, your new bank would have to evaluate your property’s value again.
For this alone, you’ll have to pay the bank anywhere between $250 to even $1,000 or higher, depending on the value of your property and whether it’s a private property or HDB.
So with all these fees, is refinancing worth it?
In summary, while the purpose of refinancing is to lower your monthly repayment, you NEED to check that the cost of refinancing doesn’t exceed the amount you stand to save.
Consider these examples:
You have an outstanding HDB loan of $200,000 with 20 years remaining, at a 2.6% interest rate.
You are paying $1,070 a month.
Say you find a bank willing to refinance at a 1.5% interest rate.
That means you now only need to pay $966 a month, or $104 less each month that what you are paying now.
However, because the outstanding loan amount is less than $300,000, your new bank does not subsidize the legal charges.
The cost of refinancing is $2,250 in total: $2,000 in legal charges, and $250 in valuation fees.
So although you can look forward to paying $104 less each month, you have to pay $2,250 upfront.
In other words, it will take 22 months before you’re actually seeing any savings. That’s almost 2 years!
Now imagine your outstanding HDB loan is $500,000, also with 20 years remaining, at a 2.6% interest rate.
You are paying $2,674 a month.
Say you find a bank willing to refinance at a 1.5% interest rate.
That means you only need to pay $2,413 a month, or $261 less each month that what you are paying now!
What’s more, since your outstanding loan amount is above $300,000, your new bank offers you a $1,800 subsidy on your legal charges.
So even though your total cost of refinancing should be $2,250, you’ll only have to pay $450.
This means that after only 2 months, you’ll already be enjoying your savings!
How would I know my cost of refinancing?
Give our friendly mortgage brokers a call. They’ll be happy to explain all the potential costs you might encounter, as well as help you find the best home loan refinancing options in Singapore.
What else do you consider other than the cost of refinancing? Share your thoughts with us.
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Tags: Home Loans