For many Singaporeans, our home loan takes up the lion’s share of our budget. As this usually goes on for 25 to 35 years, it makes sense to periodically review our home loan package. In particular, we need to look for home loan refinancing opportunities, which can lower monthly repayments and raise capital gains on resale. In this article, we will examine the best times to consider refinancing:
What is Refinancing?
Refinancing means ending your existing home loan package, and carrying on repayments with another bank’s package. For example:
Say I have a 1.95% SIBOR package, from Bank X. I have been paying this for several years. But now, I notice that Bank Y has a 1.32% SIBOR rate. I can choose to refinance from Bank X to Bank Y, thus obtaining a lower interest rate.
Refinancing is common practice in Singapore’s property industry. This is because home loan packages change all the time, and borrowers must be on the lookout for better rates. Also, there are no loyalty rewards for staying with the same bank.
Refinancing Vs. Repricing
Repricing looks similar to refinancing, but borrowers should not confuse the two.
Repricing is the process of switching between home loan packages within the same bank. To continue from the earlier example:
I have a 1.95% SIBOR package from Bank X. After paying this for several years, Bank X launches a new home loan package, offering a 1.6% SIBOR rate. If I were to move from my old package into this new one, I would be repricing, not refinancing.
It is important to note the difference, because some banks offer one “free” repricings (often called “free conversion”. In these cases, the bank will allow you to move between its loan packages without incurring any costs (which is typically an “admin fee” of about $500).
Do not assume that repricing (even for the first time) will be free. Be sure to verify the details with your bank.
As a general rule, you should refinance to a different bank so long as you satisfy all of these 3 conditions:
1) You are out of your bank’s lock-in period if any (more below)
2) You are out of your bank’s clawback period (more below)
3) There are other banks offering better interest rates than your current bank
How Much Does Refinancing Cost?
Depending on your circumstances, you may have to pay a cost for refinancing. These come from clawback and lock-in.
Before the MAS rulings in October 2012, banks used to pay certain subsidies for borrowers. This included fees like legal costs, valuation, and fire insurance, which could total around $2,000 to $3,000.
For these subsidies, the banks retained typically a three-year right of clawback. If you have one of these packages, and you refinance within three years of your loan approval, you must pay back the subsidies.
After October 2012, banks are no longer allowed to pay these subsidies. So when you refinance, you will have to pay any legal fees, fire insurance, etc. to the new bank yourself. As before, the costs are around $2,000 – $3,000. You can use your CPF to pay these costs.
Important to Note:
If you break the three year clawback and refinance to a new bank, you will have to pay the clawback fees to the old banks plus any legal fees, fire insurance, etc. to the new bank. That could come to around $4,000 – $6,000 total depending on your property type. So avoid “double paying” by refinancing after your clawback period is over!
Some loan packages come with a lock-in clause.
A lock-in usually lasts for two to five years. Should you refinance within this time, you will have to pay a penalty (often 1.5% of the remaining loan amount). In general, it is not advisable to break a lock-in, as the sum involved is substantial.
The reason banks impose this penalty is because refinancing deprives them from further making money from you through the interest payable. The penalty acts as a form of insurance to the banks.
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When Should We Refinance?
The best times to refinance are:
- A Better Package is on Offer
- You Need to Change Loan Tenure
- Savings Meet or Exceed Costs Within the Year
1. A Better Package is On Offer
The home loans market is dynamic, with banks changing their offers every month. While your loan package may have been the best some years ago, it is unlikely to stay that way.
The typical home loan package has “teaser rates” for the first two to three years, during which interest rates are kept low. From the third or fourth year onward, there is usually a significant rate hike. This is when most borrowers are advised (even by the bankers themselves) to consider refinancing.
Remember, the less interest you pay, the lower your monthly repayments become. Also, paying less interest means higher gains should you eventually sell the house.
But How Do I Know if a Better Package is Out There?
The best way is to compare all the available loan packages. You can do this very quickly, and for free, on sites like MoneySmart. With over 12 banks offering home loans, it’s unlikely that you won’t find a better deal at some point.
When choosing a new package to refinance into, you’re looking for something that’s significantly cheaper. There should be a difference of at least 0.8% between your existing interest rate and the new one. Otherwise, it might not be worth your time. If your remaining loan amount is high (say over $1 million), a difference of even 0.5% might also mean significant savings.
2. You Need to Change Loan Tenure
For some borrowers, the problem is not the overall cost of the loan, but the amount of their monthly repayments. Refinancing can help in these cases too.
When you refinance a loan, you can change the loan tenure; so long as the total tenure does not exceed 35 years (if you want to know why and how loan tenures are calculated, see here).
For example: Say you pick a loan package with a tenure of 25 years.
Five years later, your circumstances have changed, and the monthly repayments are too high. You can now refinance into a new package, with a loan tenure of 30 years instead. While stretching the loan by five years will increase the overall cost (due to interest), it will decrease the monthly repayments; easing your monthly cashflow.
3. Savings Meet or Exceed Costs Within the Year
Let’s say to refinance you have to pay back penalties, or are going to pay for new legal fees, etc.
The first step is to calculate your new monthly repayments. Now, compared to your existing repayments, how much will you save with the new loan package? The total amount saved should meet or exceed the cost of refinancing, within a recommended period of 12 months. For example, if refinancing will save you about $200/mth with the new loan but cost an additional $3000 (upfront) in legal fees, it will technically take you $3000 divided by $200 = 15 months to breakeven before real savings kick in. Is it worth the wait?
Calculating interest savings can be a difficult, since interest rates change almost daily. Also, you will need to understand how the monthly repayments are derived. Rather than write a maths textbook here, we advise you to consult an expert. Loan comparison sites like MoneySmart have a mortgage specialist on hand, who can figure it out for free.
What are your worries when refinancing? Comment and tell us about it!
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