Just like you go for a regular health check, it is prudent to re-evaluate your home loan package from time to time and understand when is the best time to refinance a home loan. Everyone’s financial situation is different and so should their approach to mortgage refinancing.
This article aims to shed light on the process of home loan refinancing and the right time to refinance your mortgage loan to save on interest costs in the long run.
When you talk home loans, you mean a large sum of money wherein even a seemingly small change in interest rates can make a noticeable difference to the total amount paid at the end of tenure.
Typically, most home loan packages offer promotional interest rates for the first two to three years, which is also the lock-in period of the home loan. Once this period is over, interest rates tend to rise significantly. So, this is the time many homeowners and investors seek to refinance their home loans and switch to cheaper interest rates.
Most home loan packages raise their interest rates after a certain period (after the third or fourth year) depending on the lock-in period. For example:
|Year 1||3M Compounded SORA + 0.7% p.a.|
|Year 2||3M Compounded SORA + 0.7% p.a.|
|Year 3||3M Compounded SORA + 0.7% p.a.|
|Year 4 & thereafter||3M Compounded SORA + 1.2% p.a.|
As you can see, the bank’s spread i.e. the percentage added over the benchmark rate is lower for the first three years in the table above, and rises in the fourth year and thereafter. That is why you should consider refinancing to new home loan packages offering better interest rates after the third or fourth year.
Let’s do some calculations to decide whether the savings from refinancing would justify the costs involved. Tip: Using an online mortgage calculator can help you see the difference in interest paid over the loan tenure.
Here is an example of Mr Tin, who is looking to purchase a private condo worth $1 million, for which he could successfully get a loan of $750,000. The interest rate offered under the loan package is 1.5% for the first three years, and 2.2% for the fourth year and beyond.
For the first three years, the monthly payment for Mr Tin will be around $3,199. However, it will increase to $3,438 from the fourth year onward. Now let’s say Mr Tin refinances his current loan package to a new package in the fourth year. He pays $3,000 as the cost of refinancing.
Assuming the new interest rate on his new loan package for the first three years is 1.2%, which will increase to 1.9% from the fourth year and onwards.
Mr Tin will now pay a monthly payment of around $3,097 for the first three years, and it will be around $3,321 from the fourth year and onwards.
As we calculate the difference in interest savings plus the cost of refinancing, we find that Mr Tin would save around $341 per month in the first three years of taking the new loan package. Over the first three years, the sum saved becomes $9,276 (i.e. $12,276 – $3,000). From the fourth year onwards, Mr Tin would save $117 per month.
As you can see, roughly, the total savings come to around $36,000 by the end of the loan tenure. Don’t underestimate the power of hoarding apparently small monthly savings; this is enough to send a grandchild through college.
When refinancing to a new home loan package, you look for something cheaper. Otherwise, it might be a waste of both your time and your money. Take the remaining amount in the loan into consideration when making a refinancing decision. If the remaining loan amount is high, even a slight difference of 0.1% to 0.5% can translate into significant savings.
As a rule of thumb, if your existing home loan is charging you anything more than a 0.3% difference compared to other options available, you might be paying more than you should. One should definitely consider refinancing to a new loan in such a situation.
Although it is recommended to wait until your lock-in period gets over, it doesn’t hurt to start shopping around early. Considering the 2 months’ notice that you need to serve with your current bank before refinancing, you must start the refinancing process within the lock-in period. Take note of the date when your lock-in period ends and work backwards from there.
Homeowners should plan for refinancing early so that they don’t have to pay a higher interest rate. Once you have chosen the bank for your refinance journey, the approval process will start and is likely to take 2 to 5 working days. During this process, you must not take any large credit lines or loans as it will affect the refinancing deal your new bank is going to offer you.
Unfortunately, refinancing doesn’t come across as simple as just pursuing a lower rate of interest. By nature, a fixed rate mortgage would come with a lock-in period and refinancing within the lock in period would mean a penalty fee.
Please note that you can theoretically refinance at any time, but it is generally advised to wait until your mortgage lock-in period is over.
If you refinance during the lock-in period, it is likely that you will be charged a penalty fee, which could be around 1.5% of the outstanding home loan amount. What’s more, be prepared to fork out thousands of dollars for additional fees & costs associated with refinancing during the lock-in period.
Therefore, it is advisable to calculate your total interest savings and not just monthly installments savings from refinancing the mortgage to a new loan package with lower interest rates. Then compare those savings with the total penalty fee charged for opting to refinance to a new home loan package.
Only if the total savings are higher than the total penalty charges, you should consider refinancing your home loan in Singapore. There are situations where you will save money by breaking your lock-in but these are fairly rare.
Similarly, it might not be smart to refinance your mortgage if you plan to sell the house in the next two years, for instance, as it gives you little time to recoup the cost.
Refinancing not only helps you save money in the long term but also increases the rate at which you build equity in your home and lower your monthly payment size.
Typically, saving anything that’s 0.3% and onwards could be enough of an incentive to refinance your mortgage. A saving of 0.3%, for instance, would result in a monthly interest saving of around $250 on a mortgage amount of $1 million. This means you will save approximately $3,000 per year.
Don’t make a hasty decision. Remember that you will be bound by a new lock-in period with the new loan package you chose.
Unfortunately, not everyone qualifies for refinancing their home loan in Singapore. When you apply for refinancing, you are basically applying for a new loan to pay off your current loan, which means banks and lenders will check your loan eligibility all over again as per their set criteria.
They will look at your income, debt, credit report, property value, and check if your financial situation has changed since you first bought your home.
Here are the main reasons why your mortgage refinancing application may get denied by banks or other lenders:
Banks or other lenders check whether you meet the TDSR limit and whether the total loan amount still meets the LTV ratio depending on the changing value of your property and your age. Focus on either generating more income or start paying down some of your debts to have a good credit score before your refinancing attempt.
Remember that your loan quantum will affect your application to mortgage refinance if the loan tenure goes beyond the retirement age of 65. For example, you can’t refinance your mortgage into 20-year loan tenure if you have been already paying a 35-year loan tenure (maximum) for 20 years. The maximum loan tenure you can get when refinancing your housing loan is 15 years in this case.
Your bank uses your home as ‘collateral’ for the loan when you are taking out a mortgage. Your mortgage refinance application may be denied if your lender bank thinks your home’s value has dropped significantly since you took out your first home loan.
You owe more than your home is worth, which also means your LTV is higher than the maximum allowable limit of 75%. In such a case, you can wait until your property value appreciates or apply for a lower loan amount by paying off your mortgage early.
Another common reason for the denial of refinancing applications is because they are incomplete. Make sure you take the time to provide all the required information to the lender with the necessary documentation to back it up.
Checking for free repricing options before attempting to mortgage refinance may also work well for some. Some people may confuse repricing vs refinancing or mistake them to be the same.
For the sake of clarity, repricing is to stay with the same bank but choose a different home loan package for a better interest rate, while refinancing is about moving to a new bank to get a beneficial deal on interest rates (with additional fees involved).
Your equity is indicative of the portion of your home you actually own. The equity you have built up in your home over the years, whether through repaying the principal or due to price appreciation, will remain yours and does not reduce when you refinance your mortgage home loan.
In fact, it helps build equity in the property faster as the interest expense is minimised via refinancing, which then helps to reduce the principal balance quickly.
It also allows you to extract some of the equity you have built in your home to cover major expenses like paying off debts, making home improvements or just providing a cushion during lean financial times. Therefore, it would actually reduce your equity in the property.
The loan-to-value (LTV) ratio, which determines the maximum loan amount you can get from the lender to finance your property purchase. Your LTV limit is simply calculated by dividing the outstanding loan balance by the indicative market valuation of the property.
For example, if you are purchasing a private condo worth $500,000 and you are approved for a loan of $300,000, then your LTV would be 60% ($300,000 divided by $500,000). An LTV ratio of less than 75% is allowable for refinancing in Singapore. Your equity position over time will vary based on the home prices in the market along with the loan balance on your mortgage(s).
Licensed valuers or surveyors, are paid a fee to comprehensively conduct a property valuation based on the following factors:
A simpler and rough calculation of the property’s market price is also possible by averaging the selling price of all similar properties transacted recently in an area. A reputable real estate agent familiar with that area’s property market can help you with this kind of valuation.
Of course, homeowners should try to negotiate with their current bank first for the best repricing offer, but also be ready to switch banks for a better refinancing offer. A new bank is more likely to offer you a better refinancing deal as for them, it means acquiring a new customer.
Also, you can negotiate for additional perks when you refinance your mortgage with a new bank, especially if your home loan is anything above $300,000. Remember loyalty towards your bank doesn’t really pay anything when you are talking about refinancing.
Singapore is moving towards a new interest rate benchmark called SORA (Singapore Overnight Rate Average) as both SIBOR (Singapore Interbank Offered Rate) and SOR (Singapore Dollar Swap Offer Rate) will soon be discontinued in line with global benchmark reforms.
SORA rates, which are based on the average rate of all interbank lending transactions, are affected by several factors including Singapore’s economic outlook i.e. a boom or a recession, the volume of eligible transactions of a minimum of $1 million from at least 5 reporting banks.
Considering the floating nature of SORA, you must ensure that you can pay off the monthly payment even during fluctuations in interest rates. As a SORA rate will increase, it will get more expensive for banks and other financial institutions to settle their accounts, so to compensate they are likely to raise longer-term rates.
Furthermore, homeowners must also take the notice period and associated costs of refinancing into consideration when refinancing their mortgage. The refinancing process includes finding a suitable home loan package, applying for the home loan with a new bank, and waiting for around three months as the notice period to your current bank.
If you don’t start early, you may find yourself stuck paying the increased interest rates for extra months. Don’t forget to consider other costs such as legal fees, valuation fees, cancellation fees as well as the clawback period of subsidies offered by the bank at the time of loan application.
Simply switching to a lower interest rate doesn’t always mean you are saving money. Be careful of what will work for you and what will not.
DollarBack Mortgage provides in-depth insights and solutions that enable consumers to make confident property decisions to ensure long-term financial benefits. We partner with all major banks in Singapore, including Standard Chartered, OCBC, DBS, Citibank, UOB, and Maybank.
This means that homeowners can choose from a wide range of refinancing options to find the best refinancing rates and deals in Singapore.
Being independent of banks and other financial institutions, DollarBack Mortgage’s team of experienced mortgage consultants do the legwork of comparing loan packages for you and offering unbiased, personalised advice that can help you secure the ‘right’ housing loan package.
Should you refinance in 2023 or wait out for even lower rates in early 2024?
Avoid these mistakes to ensure your home loan refinancing in Singapore...
Knowing when to refinance a home loan in Singapore, can save you thousands...