If you’ve just tried to refinance your home loan, you may be feeling confused. Different banks may have given different answers to your refinancing questions. It’s not their fault: The recent MAS rulings have gotten the banks puzzled. In this article, we’ll examine the point of contention: How is the maximum loan tenure calculated when refinancing home loans? Disclaimer: This article is based on the current situation as of October 2012.
A Review of the MAS Ruling
For those of you who missed it, we examined the new ruling in a previous article. This is a quick recap:
For Singapore home loans, there is now:
- A maximum loan tenure of 35 years.
- A 65 year old retirement age limit, and
- A penalty for loan packages stretching between 31 to 35 years
All 3 conditions apply to new home purchases while only restriction (1) applies to refinancing cases. Breaking any one of the applicable restrictions will result in a lower loan percentage (if it’s your first home loan, instead of an 80% loan, it will be reduced to 60%; if you have an existing home loan, instead of 60%, it will be reduced to 40%). This is a further breakdown of the restrictions:
1. 35 Year Cap on Home Loans (Applies to Refinancing)
No home loan can exceed 35 years. This is a non-negotiable cap on all loan packages. This also applies to refinancing.
Example: Say you took up a 40 year loan package from Bank A, and have been servicing it for 7 years. When you refinance into Bank B, the new maximum tenure for your new loan package is not 33 years but rather, 28 years (35 minus 7). Remember that for refinancing, you can cross the 65 year retirement age limit or the 30 year loan tenure limit without incurring any penalty. Banks however will still set a “max age” that you can service the loan till (typically 70 or 75 years of age).
2. 65 Year Old Retirement Age Limit (Does NOT Apply to Refinancing)
If the borrower would be older than 65 when the loan ends, the bank can only finance 60% of the home’s cost.
If the borrower would be older than 65 and has an outstanding home loan, the bank can only finance 40% of the home’s cost.
This only applies to new home loans, and not refinancing cases.
Example: Say you are 60 years old, are currently servicing another home loan, and wish to purchase your second property for investment purposes. The maximum loan tenure any bank will grant you to obtain a 60% loan-to-value is 5 years (65 minus 60). Should you choose to take a longer loan period, the loan-to-value will be reduced to 40%. Again, banks have a maximum age limit of 70 or 75 years which means, the longest you can stretch you loan is 15 years (75 minus 60). In this case, taking a 15 year loan tenure (absolute maximum) will result in an loan-to-value of 40%.
3. 30 Year Limit on Loan Tenure (Does NOT Apply to Refinancing)
If the loan tenure is between 31 to 35 years, regardless of the borrower’s age, the bank can only finance 60% of the home’s cost.
If the loan tenure is between 31 to 35 years, and there is an outstanding home loan, the bank can only finance 40% of the home’s cost. Again, this is regardless of the borrower’s age.
This only applies to new home loans, and not refinancing cases.
So far new home purchases have been pretty straight forward. The same cannot be said for refinancing cases. Check out our real-life case studies below, where things start to get messy and confusing. In the following example, different banks will give you two different interpretations of the rulings for refinancing:
Refinancing Interpretation 1
Let’s say I took a home loan 2 years ago, before the ruling came into effect.
I was 48 years old, and took a home loan with Bank A. MAS’s age restriction didn’t exist back then, and Bank A had an age limit of 75 years.
As such, I could choose a maximum loan tenure of 27 years (75 minus 48).
Fast forward to today, and I have been paying Bank A’s loan for 2 years (hence my remaining loan tenure is 25 years). Now I want to refinance into Bank B to enjoy better interest rates, which has a 70 year age limit.
Question: If I refinance into Bank B, what is the maximum loan tenure I can get?
Answer: In most cases, Bank B would calculate it as 70 (maximum age limit) minus 50 (my current age), to get a maximum loan tenure of 20 years.
The new rulings don’t have any relevance to my refinancing.
Yes, I may have crossed the age limit. But the age limit only applies to new loans, not refinancing cases. And even including the 2 years I spent with Bank A, the total loan tenure would be 22 years (20 plus 2), which is well within the 35 year cap.
For the majority of banks, this is the method used. At MoneySmart, we also think this makes sense. However, a minority of banks will give you another answer:
Refinancing Interpretation 2
As before, say I take a home loan from Bank A (at age 48), and service it for 2 years. Then I try to refinance into Bank B, expecting to get a maximum loan tenure of 20 years.
But if Bank B is amongst a minority of banks, they may prevent me from taking a 20 year loan. They would argue that my maximum loan tenure should be 18 years. The interpretation is as follows:
70 years (age limit) minus 50 years (my current age) = 20 years. However, I have previously serviced a loan with Bank A for 2 years. These 2 years have to be deducted from my new loan package, giving me a maximum loan tenure of 18 years.
These banks interpret the new MAS rulings as “what loan tenure you qualify for less the years already spent servicing it”. But as you can see from our summary of the rulings, this doesn’t make sense. Maximum tenure of 20 years would be well within the new ruling’s 35 year limit, and age is not a factor at all. The client in this case is also not extending his loan tenure (in fact the loan tenure is already being cut from 25 years (original remaining loan tenure) to 20 years (should the loan be refinanced). Should the government be afraid of such a property-owner profile and deem such cases as “over-leveraging”? Obviously not.
We have made repeated calls to every bank, and it’s a minority that interpret the new rulings this way. When pressed, these banks will only state they are “awaiting clarification” from MAS. Based on that response, we believe that some banks are confused about restriction (3) – the 35 year limit.
But I Need to Refinance!
In summary, if you’re trying to refinance your home loan, don’t be surprised if you come across different banks giving you different maximum loan tenures. You can either choose to wait till the banks receive clarification and sort it out, or visit loan comparison sites like MoneySmart, where a mortgage specialist can sort this out for you and determine your best refinancing options.
Is the confusion causing you problems? Still confused yourself? Comment and we’ll update you!