What is refinancing?
Refinancing a mortgage gives homeowners the opportunity to make a switch from their existing home loan to another bank. Usually one with lower interest rates can help save more money in the time to come.
When should I refinance my home loan?
You can choose to refinance your current home loan whenever you see fit (with a penalty fee) but it is advisable to wait till after your lock-in period is over before you make a change.
Lock-in periods for bank loans are generally set at 2 to 3 years and the penalty fee is typically charged at about 1.5% of your outstanding loan amount. Even so, you are not prohibited from refinancing during your lock-in period.
Lucky for some, their bank loans are not even tied to lock-in in the first place!
However, do note that you will need to give at least 3 months’ notice to your existing loan provider before refinancing. New refinance contracts are valid for 6 months so you might want to land a good mortgage as early as possible to benefit from the increasing interest rate.
What are the costs of refinancing awaiting me?
The act of refinancing during a lock-in period includes the costs of:
- Legal fees
- Valuation fees
- Prepayment penalties
- Cancellation fees
Depending on your property type, legal and valuation fees can amount to up to $2,000 to $3,000.
A cancellation fee is only incurred when a mortgage is refinanced while the property is still not complete. The home loan amount for buildings under construction is usually paid out in stages. This particular fee is estimated to be at 1.5% of the mortgage that has yet to be disbursed.
How much can I save when I refinance?
Here’s a simplified look into how you save on monthly repayments just by refinancing your home loans.
Tiffany has a remaining mortgage of $320,000 with 22 years to go. If her current interest rate is at 2.3%, that would mean she is paying an estimate of $1,546 per month.
Now, let’s say she found another mortgage plan which can offer her an interest rate of 1.8% for the first 3 years. This would reduce her monthly repayment to an estimate of $1,469 a month. This difference of $77 a month will translate to $924 a year and $2,772 after the first 3 years.
How do I compare mortgage plans for refinancing?
To refinance smartly, you will need to be adept at analysing and comparing the available mortgages in the market. These are some of the many factors you must look into before jumping ship.
Interest Rates – Fixed or Floating?
Lower interest rates are undeniably the top influential factor for refinancing – and it comes in two packages: fixed and floating.
Fixed rates have the ability to guarantee a set interest rate for a number of years that usually does not exceed 5 years. The interest rate typically increases once the stipulated period is over, and gets attached to the bank’s internal board rates. Depending on the bank, the fixed-rate packages will differ.
If you prefer predictable monthly instalments, then fixed rates are made for you.
Floating rates are slightly more complicated and tend to cause uncertainty as the monthly instalments are not fixed. There are 3 types of floating-rate benchmarks namely:
- Board rates
- Fixed Deposit rates
- Singapore Interbank Offered Rate (SIBOR)
While SIBOR has been the popular pick for many, do note that it is actually in the process of being replaced with Singapore Overnight Rate Average (SORA). Settling for SIBOR or SORA would mean having to keep a close watch on the market conditions.
Lock-in Period
As you might have already known, the lock-in period does not allow for an exit without a penalty fee. The number of years ranges from 1 to 5 years.
This factor will play a part should you:
- Decide not to stay at the property for an extended period of time
- Wish to refinance within the few years to come
- Wish to pay off outstanding loan quick
Subsidies and/or Discounts
New refinancing customers are usually offered savings and attractive cost waivers upfront. However, these subsidies and discounts usually come attached with a clawback clause. This would mean immediate repayment once the lock-in period is up – even if you decide to refinance.
Check with our own mortgage advisors to ensure you are not missing out on any of the good deals!
Possible Refinancing Costs
All the fees involved in refinancing, as mentioned previously, will need to be paid upfront before you can sign on the new mortgage at the new bank. Some of the refinancing costs can be covered by CPF.
Depending on your stand with the old mortgage loan and property type, it can cost up to $5,000.
What now?
It is best to start researching your refinancing options six months before your mortgage lock-in period ends as it will take that much amount of time to complete the entire refinancing process.
Our mortgage advisors can help you compare and decide on your best refinancing options! Get in touch and let us help you with all the nitty-gritty bits.