One piece of popular wisdom is to “refinance your housing loan often to keep rates down”. This may even be what the mortgage banker told you to do, once the rates get higher. But while refinancing is a useful tool, it’s not as straightforward as it seems at times.
Before you decide to refinance your housing loan in Singapore, use the following ‘cheats’ to guide you along.
Most home loan packages spike on the fourth year. For example, a typical SIBOR rate package may look something like this:
Year 1: 3M SIBOR + 0.7%
Year 2: 3M SIBOR + 0.7%
Year 3: 3M SIBOR + 0.7%
Year 4 and thereafter: 3M SIBOR + 1.0%
The bank’s spread (the percentage added on top of the benchmark rate) is often lower for the first three years, and then rises on the fourth year and beyond. As such, you should make it a practice to look for better rates when this happens.
There are often legal costs when it comes to refinancing. This typically ranges from $2,500 to $3,000. There may be other costs as well – for example, the bank you’re switching to may want another valuation of your property; this can cost upward of $500.
Do some calculations to determine whether the savings from refinancing would justify the costs. For example:
Say you have a loan for $1 million, at around two percent interest per annum, for 30 years. Your monthly repayments would be around $3,700.
If you refinance into a loan at 1.7 percent, your loan repayments would drop to around $3,550 per month.
This translates into savings of $150 per month. If the refinancing costs $2,500, it would take more than one year and four months just to cover the cost.
Whether this is justified is up to you, and it depends on the situation you’re in. If you’re going to sell the house in six months, for instance, it wouldn’t make sense to refinance in the above example.
But if you’re looking to free up more cash for other reasons – such as topping up your emergency savings, or raising your retired parents’ allowance – refinancing your housing loan may suit your purposes.
When you refinance your housing loan, the bank will put your finances through the usual checks all over again. This includes checking whether you meet the TDSR, whether your loan quantum still meets the loan-to-value ratio (given the changing value of your property and your age), and so forth.
Never assume that just because you qualified for a loan the first time, you will qualify for a loan again when refinancing. The process is not “automatic”.
So as you did with your first home loan, make sure your debts are paid down and that your credit score is healthy. If you have a high amount of debt, start paying it down two to three months before your refinancing attempt.
Some housing loan packages have free repricing options. Note that repricing is not the same as refinancing. Repricing means switching to a different loan package from the same bank, whereas refinancing means changing to another bank altogether.
If you can reprice for free, the cost savings can be much higher than with refinancing. For example, if you can reprice from a loan at two percent to a loan at 1.8 percent, you would save more than if you refinance from two percent to 1.7 percent (see point 2 about refinancing costs).
Say you have a 35-year loan tenure and that you’ve been paying for 20 years. When you refinance your housing loan, your new loan has a maximum loan tenure of 15 years, as you took out the original loan 20 years prior. You cannot refinance into, say, a 20-year loan tenure, as that would still exceed the maximum term of 35 years.
Also, remember that your loan quantum will be reduced further if the loan tenure would take you past the retirement age of 65. This can affect your application to refinance.
Remember how we said rates tend to jump after the first few years (see point 1)? This is why you should pay attention to the long-term rates rather than the low initial rates.
For example, say your current loan package has a “fourth year and thereafter” rate of 3M SIBOR +0.9 percent. This could be much higher than the first few years of every loan package out there.
However, what if all the other loan packages have a fourth year and thereafter rate of 3M SIBOR + 1.2 percent?
When that rate hike comes around, you may be unable to find other loans with a final rate as good as your current package. If you have a long time yet to service your loan, focus on the final rates.
The exception in this scenario is if you intend to sell the house, before the jump in interest rates happens.
If there is a lock-in clause on your loan, the penalty to refinance is often 1.5 percent of the remaining loan amount. If you still owe $500,000, for example, you would end up paying $7,500. This is on top of the usual refinancing costs.
There is almost never a situation where you will save money by breaking your lock-in. Unless your loan rate climbs so high that staying with it would cost more than the lock-in penalty, it’s better to just bear with things until the lock-in period is over.
Just about everything to do with home loans seems to involve costs. The one free thing you can get is a home loan specialist (they’re effectively paid by the banks to help you).
A home loan specialist can give you advice on whether now is the right time to refinance (sometimes there are just no good loan packages), and on how to minimise the costs.
It’s especially helpful to get a home loan specialist if you got your loan back in 2012 or earlier. This is because new loan curbs, plus your current age, can mean you won’t qualify for loans that you could previously get.
It’s always a good idea to check home loan rates every few years to see if a better deal is out there. But at the same time, be careful not to jump the gun – simply switching to a lower rate doesn’t always mean you’re saving money.
Play it safe and talk to a home loan specialist first, and get them to crunch the numbers for you
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