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What To Avoid When Refinancing A Home Loan In Singapore!

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When you refinance, you are essentially switching from your current mortgage to a new one from another bank, often with more favourable terms. Your bank simply uses the newer mortgage to pay off your existing mortgage, so you are left with just one loan and one monthly payment. In other words, when you refinance, your loan is essentially ‘transferred’ from your existing bank to a new bank.

However, refinancing without proper planning and maths can sometimes lead you to pay off extra. To ensure your refinancing decision turns out to be a smart financial move, you must check if the potential interest savings from refinancing your home loan are more than the costs involved.

What should I do before refinancing my house?

One of the biggest confusions for anyone looking to refinance their house is who to refinance with. A convenient way to start is to try and bargain with your current bank and see if they can offer you a ‘good’ refinancing deal – considering the upfront costs of refinancing.

There are good chances that your existing lender might waive some of the costs of refinancing to retain you as a customer. But don’t get stuck here. Loyalty towards your bank, in this case, is of little help.

Therefore, it is a good idea to shop around with multiple banks or lenders to get the best refinance quotes. Be prepared to switch banks if you are getting a better refinancing deal with a new bank and cost-saving is your number one priority.

You might also get additional perks when refinancing with a new bank, especially if your loan amount is significantly large as the stakes of getting a new customer are usually high among banks. You can simplify this process of cross-comparing mortgage rates from different banks and financial institutions in Singapore by reaching out to a professional mortgage consultant from DollarBack Mortgage.

Another option apart from going to another bank for home loan refinancing is repricing, which means you stay with the same bank but switch to a new (cheaper) loan package. However, in most cases, interest rates offered when repricing your home loan are higher than if you had refinanced.

Let’s take a look at the pros and cons of sticking to your current banks as compared to switching banks so that you can make a decision that best suits your goals and financial situation.

Quicker, easier loan processing as they already have your informationNo guarantee of getting the lowest interest rates available today
Waiver or relief on the costs of refinancingStill have to put in work to compare rates from other lenders
May be able to negotiate better termsMay have to go through the underwriting process again
Maybe rewarded for loyalty in the forms of discounts for having multiple accountsSwitching could get you better service elsewhere

Another mistake a lot of homeowners make when refinancing their home is trying to time mortgage rates. Timing mortgage interest rates is not practical – just like timing the stock market. People would watch daily changes in refinance rates when interest rates are low, trying to jump in at the spot when rates drop further to their absolute lowest.

What should I watch out for when refinancing?

Refinancing should depend on a homeowner’s financial goals and needs. Apart from lower interest rates on mortgages, there are still a few pointers to take note of.

1. Lock-in period

Most housing loan packages come with a lock-in period of two to three years. Wait to refinance with a new bank if you are still serving the lock-in period or you might have to pay an early repayment penalty on the outstanding amount of your private property loan. There are currently no such restrictions on HDB loans.

2. Thereafter rates

The attractive interest rates that you might have signed for could change drastically and higher rates might kick in after a certain period. Make sure you move to your new bank at the right time to avoid paying mortgage instalments with the new higher rates.

3. Interest review dates

If your loan package is pegged to a SORA rate, which reset quarterly or monthly, you must make out if there is a particular time and day that you can make the switch – otherwise, you may be subject to a penalty fee (1.5% of the outstanding loan amount) again!

The interest review dates begin from the day your mortgage loan is disbursed. Often the banks dissuade homeowners from redeeming the loan until the day the loan is intended to reset. Ideally, you should execute on the next available redemption.

4. Total Debt Servicing Ratio (TDSR)

To determine whether you should refinance or not, you need to discover how economical your anticipated refinancing plan is. One should see how it might affect your TDSR and check whether the result is within your comfort zone.

The magic formula for TDSR calculation is to take your total monthly debt obligations and divide them by your gross monthly income.

Credit Score

Your credit score allows you to comprehend whether or not refinancing at a particular moment is possible or worth it. For instance, if a borrower’s credit rating has not improved since the last time their loan application was declined, it is likely to get declined again due to their previous credit reputation. Try improving your credit score consistently before trying to refinance again.

The most important thing to remember is to not take on any large credit lines or loans during this process as it will affect the offer that your prospective bank will make you, and this is something that will be out of your control once done.

Additionally, bear in mind that mortgage refinancing may not be the best move always. As a homeowner, you will have to see how long it takes to break even before you refinance, i.e. how long it takes your interest savings from refinancing to exceed what you paid to refinance. It is a good idea to calculate the break-even point taking all your refinance expenses into account.

For example, if refinancing your mortgage loan with a new bank costs $5,000 upfront while you save just $100 per month with the new mortgage loan package, then in order to make the refinancing worth it, you will need to stay in the same home for at least 50 months – that is just over four years.

Typically, the longer your mortgage loan term, the more interest you are expected to pay. On the other hand, loans with shorter terms generally have lower interest costs but higher monthly payments.

But if your financial situation has changed due to an adverse event, such as divorce, layoff or a major medical expense or you are struggling to meet the monthly financial obligations, high monthly mortgage payments can put a strain on your financial situation.

In such a situation, it makes sense to stretch out the loan term and reduce monthly payments as it is better to have a longer-term mortgage than to risk losing your home or damaging your credit rating by making late payments. Keep in mind that you can always pay extra if you have funds, but never less.

What to avoid when refinancing?

Generally, homeowners need to pay legal and valuation fees when they refinance. Depending on the property type, this can cost them anything between $2,000 to $3,000. However, many times, banks offer to subsidize these costs to incentivise homeowners to refinance under some circumstances.

For example, many banks may be willing to defray the legal fees with subsidies if your outstanding loan amount is substantially large (above $500,000). Get in touch with a professional mortgage consultant who can help you save on these fees.

However, do note that such legal subsidies often come with special terms & conditions. Let’s say you are refinancing your mortgage loan to a new bank. Your new bank may offer you a subsidy of $2,000 to help lower the closing costs.

However, please note that such subsidies from banks often come with a ‘clawback clause’, which specifies that you can’t refinance again for a few years (typically during the lock-in period). And if you do, you will have to pay for the additional subsidies given by the bank under the clawback clause.

In other words, the bank will claw back the subsidies given at the time of loan application if you don’t stick with the bank for a certain duration.

As discussed, keep note of the date the new interest rates will kick in. As all banks require you to serve a 3-month notice before porting your loan over to another bank, you will want to take note of the date the higher rates will take effect and thus start the process of refinancing well ahead of the designated date.

Don’t wait for the lock-in period to end and then start looking for your refinancing options. The right time to begin the process of refinancing is about 3-4 months before the date your lock-in period ends as it will also factor in the application time (typically 2-3 weeks) with the new bank.

Technically, there is no limit on the number of times you can refinance your mortgage loan. You can refinance your home loan as often as you would like, as long as you are meeting the eligibility requirements of the lender.

There are no refinance rules that could restrict how often you can refinance. But does that mean you can keep rushing to refinance your home loan even when you have recently done so, especially when interest rates are already near record lows?

You can’t refinance your mortgage too early — or too often — if you are saving money. Only if the expenses associated with refinancing do not cancel out your interest savings then it is okay to refinance as often as you want.

When is refinancing a bad idea?

When the time is right, refinancing is a great way to use your home as a financial tool. However, refinancing could be a bad idea in some situations. Here are a few examples:

Situation 1: You are enjoying one of the lowest interest rates already

If you have taken up a floating rate package when SORA was high, you should be experiencing one of the best currently available housing loan packages with a really low spread.

For example, if your SORA home loan package is something like this – 1M SORA + 0.25%, it means you are lucky to get a bank spread as low as 0.25%. It is definitely unlikely to choose a loan with higher interest rates and thus refinancing anytime soon would not be a good move.

Situation 2: You are getting a lower repricing deal

When repricing, your bank may offer you a lower interest rate in lieu of not switching to another bank. If you are getting a good repricing deal that beats the expensive switching costs when you refinance, then refinancing to a new bank could be a bad idea.

Situation 3: Your bank is penalising you for repaying your loan early

Don’t forget to check for early repayment penalties & fees when taking up a bank loan. The fees charged may vary from bank to bank. The penalty for early repayment is usually 1.5% of the outstanding loan amount.

Final Thoughts

With such a competitive mortgage industry in Singapore, refinancing should be done as often as possible and to ensure that you always enjoy the best and lowest interest rates on the market.

Ready to refinance your loan? Consult one of our mortgage consultants to help you review your refinance options and lock your interest rate.

Our mortgage consultants can help you take advantage of refinancing promotions when they are launched to secure the lowest refinancing packages for your home loan. We also help you get bank subsidies and cash rewards with zero upfront fees. Get started with Dollar Mortgage today.

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