Back in 2011, I was convinced banks installed revolving doors just for home loan customers. People refinanced more often than we got to change underwear in NS. It was an industry norm; you’d pick the cheapest loan for three years, and then refinance on the fourth. Since 2013, its not that easy anymore…but you can still save money:
What is Refinancing Anyway?
Refinancing is the process of transferring your home loan to another bank. We have an article on it, but here’s the quick summary:
When you get a home loan package, it tends to look something like this (exact numbers may vary):
Year 1: 3 Months SIBOR + 0.85%
Year 2: 3 Months SIBOR + 0.85%
Year 3: 3 Months SIBOR + 0.85%
Year 4 and Thereafter: 3 Months SIBOR + 1.25%! Special loyalty bonus! Now with extra cost!
(We’ve got another article for you if you want to know what 3 Months SIBOR means)
When you refinance, you switch the home loan package on that all-important fourth year. This keeps the home loan interest rates low. Refinancing is especially important in Singapore, because bank loans do not have permanent fixed rates.
Quick Note: Refinancing vs. Repricing
Refinancing means switching your home loan to another bank. Repricing also means switching your home loan, but to a package offered by the same bank you’re with.
For example, if you switch from a CIMB home loan package to a DBS home loan package, that’s refinancing. If you switch from CIMB home loan package X to CIMB home loan package Y, that’s repricing.
There is little difference between the two, except that refinancing requires legal costs and valuation fees, so repricing may be slightly cheaper depending on the bank. Some home loan packages do offer one or two free repricings.
Why is Refinancing Different in 2016?
A number of factors makes refinancing different: tweaked cooling measures, depressed property market, whether Donald Trump will get elected, etc. But while refinancing decisions are tougher, that doesn’t mean you can’t save money from it. You just need to look out for these:
- Volatile Interest Rates
- Restrictions on Loan Tenure
- The New TDSR Framework
- Legal Subsidies are Limited
1. Volatile Interest Rates
Interest rates were expected to rise significantly, after being at their lowest for a decade. And to be fair, they were on their way up in the past year. But defying all expectations, the SIBOR has actually been dropping since March. And thanks to a little incident called Brexit, there’s actually a pretty good chance it’ll remain low for the rest of the year.
What’s more, the bank’s spread (the percentage added to the SIBOR) has actually been going down. See, there’s a price war going on now between the banks, with banks sometimes even offering multiple competing products, such as SIBOR-linked packages and fixed deposit-linked home loan packages.
This means home owners who want to refinance should check the “thereafter” rate on the new home loan they are eyeing (see the example above, where we wrote Year 4 and Thereafter). As interest rates rise, it might be wise to consider a good long term home loan package that has decent “thereafter” rates. Don’t be sucked into mistake of focusing only on the first 3 years and assume you can keep refinancing on the 4th year. Who knows, by then, the available home loan packages (4 years from now), might have year 1,2 and 3 rates that are higher than your existing “thereafter” rates. Nothing is 100% certain, but I’m just saying… 🙂
If you need help looking for good long term home loan packages, you can look for home loan refinancing at MoneySmart.
2. Restrictions on Loan Tenure
Under the new home loan curbs, the maximum loan tenure is 30 years for HDB flats and 35 years for private properties. This cannot be stretched by refinancing. An example:
Say I’ve had the same HDB home loan package for 11 years at Bank A. When I refinance into a new one at Bank B, the maximum loan tenure for the new package would be (30 – 11) = 19 years. It doesn’t matter if you got a longer loan tenure before (e.g. 40 year loan tenure). Everything will be re-adjusted to current rules and regulations when you refinance at this point.
Shorter loan tenures mean higher monthly repayments, which in turn mean a higher Total Debt Servicing Ratio (TDSR). Some borrowers may not be able to refinance because of this.
3. The TDSR Framework
Here’s the most important thing you need to know about the TDSR framework for home loans:
When you refinance, you will be subject to TDSR, UNLESS the property is owner-occupied.
This was recently reiterated by MAS with the reassurance that even if you took out a home loan after TDSR was introduced a couple of years ago, you would always be able to refinance it if you were the owner-occupier.
Refinancing means going through a whole process of credit checks again. Your Mortgage Servicing Ratio needs to be 30% or under, you get a haircut on variable income, etc. In particular, note that the TDSR framework takes into account all unsecured credit facilities, such as credit cards.
So because current loan restrictions are tighter than before, you may find that you no longer qualify for a home loan. Still, there’s no harm in trying to refinance, if your current rate is high.
You won’t have to worry about this if you are currently living in the property you are hoping to refinance, but if it’s an investment property, you will be affected. The TDSR tweaks in 2016 say that you have to commit to repaying at least 3% of your outstanding amount should you want to refinance.
4. Legal Subsidies are Limited
There are some legal costs when you refinance your home loan. You need to entrust somebody with the proceedings, and lawyers are paragons of honesty.
Well, if you’re refinancing, lawyer fees costs about $2,000 to $3,000, give or take. Repricing is cheaper, and usually costs between $500 to $800 for administration fees. Both can be paid by CPF, don’t worry.
In the past, the banks almost always subsidised the legal fees. But due to changes by the Monetary Authority of Singapore (MAS), a lot of banks stopped offering this for a while. The practice is slowly coming back for refinancing, though!
What this means is that if you want to refinance your home loan, you need to ensure your monthly savings are not negated by the legal fees you have to pay upfront. If you’re paying $3,000 in legal fees but saving $500/mth, that’s a worthwhile switch (it will take you 6 months to “break even”). However, if you’re paying $3,000 to save $50/mth, that might not be so worthwhile (since it will take you 60 months or 5 years to “break even”).
The minimum loan size to get a legal subsidy is currently around $300,000 to $500,000. The banks that offer legal subsidies (and their minimum loan size requirements) are:
DBS – $500,000
OCBC – $300,000
UOB, ANZ, Citibank and SCB – 0.4% of the loan amount, subject to a cap of $2,000 for private property and $1,800 for HDB
Should You Refinance?
At this point in time, you’d be a fool not to refinance. The current price war has kept interest rates low and many packages have no lock-in period. At the very least, you should compare your home loan rates every three to five years. There may be something cheaper on the market, and there’s no harm trying for it (at worst, you just don’t qualify).
You should also refrain from taking on a personal loan, car loan, etc. if you intend to refinance. The added debt could drive your TDSR past the 60% limit, but of course, that doesn’t apply if it’s an owner-occupied property.