Are you loyal to your bank? If the answer is yes, then I have bad news: Loyalty doesn’t pay, at least when we’re talking about refinancing home loans in Singapore.
When hunting for a good home loan, the rates that you get are usually for the first 2 to 3 years. The rates start to spike from the 3rd or 4th year, which means it’s probably time to refinance.
Before you start swapping home loans though, ask yourself the below questions.
1. Will you lose more than you save?
When people talk about refinancing, they focus on getting a lower interest rate. That’s definitely the task at hand, but don’t overlook the costs of refinancing, such as cancellation fees, as well.
The key thing when refinancing is to find a breakeven point where savings from your new loan are enough to recoup the refinancing costs. You can do that by tabulating how much you will pay at the end of the current package and the new one. Will refinancing costs exceed the savings?
If you don’t want to crunch the numbers, just get one of our mortgage specialists to do it for you.
Also, you want to check out the “thereafter” rates on the new loan package. It might be worse than your current loan rates, after two or three years. This might not be a problem if you’re selling soon (see #3), but it does make the new package a bad idea in a long run.
2. Would it be cheaper just to reprice your home loan?
Repricing is not the same as refinancing. Refinancing means switching banks altogether, whereas repricing just means switching to a cheaper loan within the same bank. Sometimes, a repricing option is indirectly cheaper than a new loan package.
Say a repricing option lowers your interest to 1.5%, whereas a new loan package from another bank would lower it to 1.3%. Ordinarily, the new bank’s package would be cheaper. But if your bank has a free repricing option, you can switch to the 1.5% interest without paying refinancing costs. Overall, that could save you more money than refinancing.
3. How much longer do you want to hold on to the house?
If you’re intending to sell the property soon, you can constantly refinance into cheaper packages. You don’t really need to care about long term “thereafter” rates, because the house will be sold by then.
On the other hand, if you want to stay in a house for a long time – which is the case for most owner occupiers – then don’t be too quick to swap. If you have a loan with a good “thereafter” rate, don’t give it up for a package that’s only cheaper for a few years.
4. How hard will your current bank penalise you?
It is never worth refinancing when you’re in a lock-in. The penalty is usually a percentage of the outstanding loan, but take our word for it: you will lose way more money than you could possibly save.
This is the drawback to home loans with very long fixed rates (e.g. five years or even eight years). For as long as you’re paying a fixed rate, it’s assumed that you’re also locked in. So if a cheaper home loan comes along, all you can do is seethe in impotent rage.
Before refinancing, check if your current home loan package has a lock-in clause. If you’re not sure, call your bank!
5. Are you prepared to pay the refinancing costs?
Refinancing costs are around $1,500 to $3,000, depending on the cancellation fees, prepayment charges and legal fees of your package. You can use your CPF to pay for these. But those aren’t the only costs.
When you refinance, you go through the whole process of loan application again. And because of cooling measures, it’s entirely possible that someone who qualified back in 2012 won’t get the loan in 2014. So don’t assume that refinancing can be done as easily changing to another savings account.
To refinance, you’ll have to spend some time clearing up outstanding loans (to meet debt servicing ratios), and doing a ton of paperwork. If you want to know how to speed it up, just book a call with MoneySmart’s mortgage specialists.
What stops you from refinancing? Too troublesome? New loan restrictions? Have no idea what we’re talking about? Comment and let us know!