It’s a bright sunny day, the birds are singing and a light breeze blows steadily from the north. Relaxed, you sit down to open your mail for the week and discover a bank statement. Your eyes glance over the harmless looking document, stopping only when you notice “… interest rate will be amended to 3.75% as of next month”.
The birds aren’t singing anymore, in fact they don’t even seem to be around the area at all. Chances are they’ve flocked in fear to the nearest bank branch to check if their mortgage loans were in need of refinancing.
The consequences of not refinancing your mortgage loan in time really can sneak up on you, especially when you don’t know what you need to be looking out for when you take up a housing loan. Here’s how to stop this from happening to you.
1. Why It’s Important To Refinance When Necessary
Most housing loan packages from private banks are structured to be low in the first 2 – 3 years and then rise in the 4th year to a higher rate that stays for the tenure of the loan. Be it floating rates pegged to the SIBOR, Internal Board rates or Fixed rate packages, they all rise after the first 3 years most of the time. And depending on what kind of a package structure you are on, you could get caught with interest rates in your 4th year from as high as 2.5% and upwards. This is bad news for your pocket and you need to make sure this does not happen.
A 27yr housing loan with, say, $500k outstanding could be costing you approximately $1,854/mth at 1.4% and will jump up to an estimated $2,410/mth, should your interest rate hit 3.75%.
That’s a lot of bird-seed money.
2. What To Check So You Know You Are Ready
1) Know how long your lock in period is for or if you even have one.
Check to see if you have a lock in period on your package, if you do, this means that you will not be able to refinance or make partial payments during this period. (Well you can, but you’ll be charged a cancellation fee that will make the refinancing meaningless.) Most lock in’s last for about 2 – 3 years from the time of the first drawdown of the loan.
If you have no lock in period on your package, you don’t have to worry about this. Refinancing before the end of the lock in period is not cost effective due to the penalties you have to pay.
2) Check to see if you have a clawback period in your contract
Clawbacks happen when the bank gives you any subsidies at the start of the loan such as money for legal fees, free fire insurance or valuation reports. Usually these subsidies amount to about $2,000++ and the bank will make you pay them back if you leave before 3 years from the start of the loan.
It should be noted that this would not be an issue for buyers who purchased after the latest MAS rulings, which disallow the provision of subsidies for new purchases.
Once again, paying for the clawback makes your refinancing meaningless.
3) If you bought a building under construction:
If your property is still under construction, you should not be looking into refinancing now as the bank will charge you cancellation fees on the loan, even though you may not have any lock in periods or have completed the lock. This is due to the fact that if the Certificate of Completion (CSC) has not been given to you, it usually means that the bank has not yet disbursed the full loan out to the developer.
You will thus be charged cancellation fees on the amount that is still undisbursed. Even if the Temporary Occupation Permit (TOP) has been issued for your property, it may not mean the CSC is given out immediately, so check on this.
4) Always remember the mandatory notice period
Every bank will make you serve a notice period of 3 months before you can leave the bank without having to pay a penalty. It is important to factor this into the timing of your refinancing i.e.:
If your lock in period finishes in December, you should start looking into refinancing around the end of September, so that you can serve your notice period concurrently while waiting for December to arrive. Miss this, and you could be refinancing only in January or February, thus paying a higher interest rate for an extra 2 months or so.
Remember, having to pay for things like cancellation fees, clawback fees or any penalties make refinancing lose it’s cost effectiveness. You would have to first break even on any of these costs before you even start to save money on a new lower interest rate at another bank. Depending on how much your loan is, this could take up to 2 years.
If you are interested in finding out the latest refinancing rates and whether it makes sense for you, you can always head on over to MoneySmart’s Refinancing Wizard and figure it out in a matter of minutes!