Why Refinancing Your Home Loan Is Still Worthwhile Even Without a Legal Subsidy

Why Refinancing Your Home Loan Is Still Worthwhile Even Without a Legal Subsidy

In some ways, find a good home loans like finding the perfect life partner. You always want what’s best for you. And you’re expected to spend the rest of your life paying back the home loan. Yes, 70% of you voted for that. Unlike finding the perfect life partner, however, you’re not expected to spend the rest of your working life with the same bank paying back your home loan. There’s no loyalty when it comes to saving money on your home loan. You should refinance your home loan as soon as you’re able to.


Wait a minute… what does refinancing my home loan mean in the first place?

Refinancing means you switch your home loan from one bank to another. Don’t worry, it’s not like a break-up. As Michael Corleone said in The Godfather, “it’s not personal, it’s strictly business.” Literally.


But I like the service my bank is providing me. Why should I refinance my home loan?

Most fixed or floating rate home loan packages charge lower interest rates for the first three years. Then, in the fourth year and beyond, the interest rate usually goes up.

When this happens, it makes sense to shop around and see if other banks have better rates. Better almost always means lower interest rates. The whole point of refinancing is to save money by lowering your monthly payments, pay off the loan faster or to respond to changing market rates due to a rising SIBOR.


But refinancing seems like complicated process. Is it worth it?

Since home loan packages usually have a higher interest rate from the fourth year onwards, you’re going to be paying more each month if you don’t refinance. So unless you think your bank is a charity needing your financial support, it doesn’t make sense to stay with them if there’s a better option out there.

Refinancing also helps you avoid escalating market rates. Say you’ve been on a SIBOR-based floating rate package and taking advantage of the low rate thus far. Now that the SIBOR is on the rise, switching to a fixed rate home loan might save you money in the long run.


Sounds good! Let’s get our home loan refinanced now!

Whoa, whoa, whoa… let’s find out how much refinancing costs first. Back in October 2012, MAS prevented banks from packaging legal subsidies and other freebies into the loan. As a result, most banks like DBS, UOB and OCBC have stopped offering legal subsidies altogether. Even though it’s technically still legal as long as you’re not forced to take it up.

It’s kinda like chewing gum – it’s not illegal to chew, it’s just illegal to bring it into Singapore. But there will always be the by the book kids who think they shouldn’t be chewing gum anyway.

Anyway, because banks aren’t allowed to include legal subsidies in their refinancing package, there are now three main factors to consider when refinancing:

  1. Legal fees – about $1,800 for HDB, $2,500 to $3,000 for private property
  2. Valuation – about $500
  3. Fire Insurance – about $100 to $300 per year

So, all in all, refinancing for a HDB flat is about $2,500, while refinancing a private property would cost about $3,500.


Wow… that’s seems rather expensive. What are my options?

You don’t have to deal with refinancing yourself, especially if you are unsure about what makes the most sense for your current situation. You can easily get some free advice from the mortgage team at MoneySmart after putting in some simple details into the refinancing wizard. Here’s what you should know about what you can do before speaking to them:


1. Refinance to a home loan package with a legal subsidy

Just be aware of what taking on a legal subsidy might cost you down the road. Legal subsidies usually come with a clawback clause. Clawback means that the bank can claim the subsidies back from you if you refinance within the lock-in period (usually three years). This means you might end up missing out on a good loan package simply because it doesn’t make sense to refinance and incur the clawback.


2. Refinance to a home loan package without a legal subsidy

Since most banks don’t offer legal subsidies, it might seem like an expensive idea to refinance. But actually, you just need to do the math.

Firstly, you need to ask yourself if you’ll save more money by refinancing even though you have to pay the legal subsidy. For example, say refinancing will help you pay $600 less each month. Even though the cost of refinancing is $3,500 – you would have still saved money by the end of the year. However, if refinancing will only save you $100 in monthly payments each month, then it might not be worth your while. After three years, you would only have saved $100 – definitely not worth the effort of refinancing.

Secondly, you need to ask yourself if you have the cash to refinance. If not, you are allowed to use your CPF to cover most (but not all!) of your payment. Whether you want to use your CPF or not is up to you – just remember that your CPF funds are earning a half-decent amount of interest.


3. Repricing

Repricing is basically “refinancing”, but with the same bank. However, in most cases you will not be able to use your CPF for repricing. So make sure you have sufficient cash on hand.


Are you considering refinancing your property? Share your concerns with us.