In the 2nd instalment of our #RecessionReady series, we look at how to reduce costs, especially at a time when our economy, jobs and possibly finances have taken a hit due to the ongoing Covid-19 pandemic.
Reducing costs doesn’t just apply to our everyday spending, which tends to be more fluid with more moving parts that can be replaced with cheaper alternatives (if possible), moved to the next month’s budget (if it can wait), or removed altogether (non-essential purchases AKA our wants).
We can also aim to reduce our fixed payments and loans. For most of us, our mortgage is probably the biggest loan we will ever take. So it’s pertinent to try to spend wisely in this area as much as possible.
And can we reduce our monthly mortgage payments, despite already having opted for a HDB housing loan? The short answer is yes — here’s how:
What is refinancing?
Let’s introduce our fictitious loving duo, Angie and Andrew. They have been paying for their 5-room HDB BTO flat via the HDB home loan.
They can choose to switch their home loan from HDB to a bank for a lower interest rate, AKA refinance their home loan. Over time, this can help save them money in the long run.
Ideally, Angie and Andrew should look to refinance their home loan every few years or so, especially if they can find another home loan that offers a lower interest rate.
This means that:
– Their monthly mortgage repayments are lower
– Total interest payable is significantly reduced (it can be a 5-figure difference)
When they lower their monthly mortgage repayments, this means paying less for their home loan every month, i.e. using less CPF monies if they are paying for their home loan through CPF. By using less CPF monies, that’s more money in their CPF account to attract interest and for their retirement.
- Switch from HDB home loan to a bank’s home loan = refinance
- Switch from Bank A’s home loan to Bank B’s home loan = refinance
(There’s also option 3, repricing, in which you stay on with Bank A or Bank B after your lock-in period at the new rate. Only an admin fee is payable, and you can skip the legal/valuation fees)
However, do note that once you refinance your HDB home loan with a bank’s home loan, you won’t be able to switch back to the HDB home loan.
There are also other fees payable when you refinance, such as legal charges and valuation fees — the good news is that some banks such as POSB will offer subsidies for these amounts if your home loan amount is large enough (with some terms and conditions attached, of course).
Can’t I just stay on my HDB loan?
Most of us get HDB loans at the beginning because of the low down payment requirements.
It was a no-brainer for Angie and Andrew, because:
Down payment for HDB concessionary loan: 10% (can be fully paid for with CPF)
Down payment for bank home loan: 25% (of which at least 5% must be in cash; the rest can be paid for with CPF)
As a newly married couple with grand plans to start a family, Angie and Andrew sure didn’t have $20,000 spare cash lying around. So they opted for a HDB concessionary loan as their CPF monies were pretty healthy.
However, now that they’ve settled down and have more savings to spare, they are looking at reducing their mortgage payments. In addition, markets have not been performing well, creating a low interest rate environment, and this brings down the mortgage lending rates.
They bought a 5-room HDB flat 5 years ago, and after deducting their CPF, they are currently left with $300,000 to pay over 20 years. As they are first-time home owners, they pay a HDB concessionary loan of 2.6% p.a. (current CPF interest rate + 0.1% p.a.).
Here’s a quick run through of what our imaginary couple would need to pay if they refinance with a POSB home loan (rates as of 2 July 2020), assuming that rates remain constant:
|Loan type||Interest rate||Monthly repayment amount||Projected total interest after 20 years|
|HDB concessionary loan||2.6% p.a.||$1,604.36||S$85,047.40|
|POSB home loan||~1.5% p.a.||S$1,447.63||S$53,140.62|
This means that A&A can potentially save about $156.73 on mortgage payments every month.
Thus, it makes more sense for them to exit the HDB concessionary loan now and refinance with a bank’s home loan — so they can pay less in the long run.
Also, if you didn’t already know, you can still use your CPF monies to pay for your mortgage payments even if you refinance with a bank. This can make all the difference if there’s already a cash outlay for your HDB concessionary loan, and you will also be able to accrue more funds in your CPF account for retirement.
What is the best threshold to refinance your property?
Refinancing sounds like the smart decision for Angie and Andrew — but should everyone refinance their property?
Firstly, some home loan packages are valid with a minimum loan amount of say, $100,000. You probably can’t jump ship (or bank) any lower than that.
Next, do note that when you refinance with a bank, there are legal fees and costs for valuating your property. This can add up to an upfront payment of about $2,000-$2,500, inclusive of valuation fees.
The good news is that for substantial loan amounts, the bank may offer subsidies to defray some of these costs. For example, for a loan amount above $250,000, POSB is offering a cash rebate of $2,000.
The general rule of thumb is that the fees you need to pay upfront don’t exceed 1 year of money saved.
For Angie and Andrew, who are taking a $300,000 home loan with POSB, it makes sense:
|Estimated fees payable upfront||~$0-$500 (after $2,000 subsidy)|
|Savings enjoyed from refinancing after 1st year||$156.73 x 12 = $1,880.76|
However, for their friends who have $100,000 left on their HDB concessionary loan to repay, with 15 years remaining, it might not make so much sense (assuming that rates remain constant):
|Loan type||Interest rate||Monthly repayment amount||Projected total interest after 15 years|
|HDB concessionary loan||2.6% p.a.||S$671.50||S$20,871.23|
|POSB home loan||~1.5% p.a.||S$620.74||S$12,836.28|
Savings on mortgage payments = $50.76/month
|Estimated fees payable upfront||~$2,000-$2,500 (no subsidy)|
|Savings enjoyed from refinancing after 1st year||$50.76 x 12 = $609.12|
The fees payable upfront far outweigh the savings in the first year, so it might not make sense to refinance in this case. Note: Some banks don’t accept applications for home loans below a certain amount, i.e. below $100k. Do check with your preferred bank.
A&A’s friends can consider the following options:
- Make partial capital repayments to their HDB loan if they have enough CPF in order to reduce the total interest payable (but do note that CPF monies attract a good interest rate, so do your math before deciding if it’s worth it!)
- There’s also an option to increase their monthly repayments via the CPF website (they should be earning more now than they did when they first bought the house), which should result in lower total interest payable (same note about CPF monies applies here too)
- Look for an investment that offers higher interest rates than their existing home loan. Strange as it seems, this could help to offset the interest paid for the home loan. Check out some investment options from POSB here.
Before you refinance…
Some things to note before you jump onto the refinancing bandwagon:
Look out for a separate clawback clause — this means that you could be required to pay back the subsidies that were disbursed.
There is always a 36-month clawback period regardless of the loan package lock-in period. This means that if Angie and Andrew take a 2-year home loan package, they need to return the subsidy when they exit the package. However, if they take a 3-year package or longer, there’s no need to do so.
There are other fees and charges that may be incurred, such as penalty fees for cancellation, early repayment, or refinancing with another bank before the lock-in period is up.
For example, check the lock-in period. Has it ended or is it ending soon? There could be a penalty for redeeming the loan, as refinancing with another bank is considered a full redemption. In Angie and Andrew’s case, since they are on the HDB concessionary loan, there is no lock-in period.
And do remember that when you refinance, you cannot go back to the HDB concessionary loan. You will also need to search for new home loan plans to refinance your home loan every few years, when your package is expiring and/or when home loan rates are low.
As always, do your due diligence and read all the fine print/T&Cs before making a decision.
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