A Better Rate Is Waiting, Refinance Your Home Loan & Save Big

Mortgage refinancing occurs when you change from one home loan package to another. This is often due to the fact that the curren interest rates are much lower in the market as compared to your existing property loan package. There are situations when homeowners refinance from their current floating rate packages to a fixed rate in view of the rising interest rate environment. One simple example would be you are currently into the fourth year of your home loan package with your existing bank paying 2.20% Fixed Deposit Linked interest rate.With the current interest rate environment dropping so quickly, other banks in Singapore are offering 1.30% SIBOR interest rate. By doing a refinance, you can reduce your monthly instalment and save up on unnecessary interest payments. With the lowered interest rate, more of your monthly instalments will go towards reducing the principal balance. Note that there is no such thing as preferential treatment for banks existing customers. When there is a better home loan package out there, it is in your best interest to refinance and save on the biggest commitment in our lives.

These two terms might sound alike and easily confused by homeowners, but note that they are entirely different. The process of switching your current mortgage loan from your existing bank to another bank which offers a lower interest rate package is known as refinancing. If you are changing a home loan package within the same bank, it is known as repricing. It is in the best interest of homeowners to know what all banks are offering for home loans to be able to make well informed decisions and enjoy the best deal. Existing bank customers might find themselves paying higher interest rates as compared to new to bank customers. Bad habits such as “convenience” or ignorance can cost you money. Typically refinancing will favour sizable outstanding property loan balances while smaller loan sizes such as HDB with an outstanding mortgage of $150,000 might find repricing to be worthwhile because of the initial cost of refinancing. Note that some banks offer a one time off free repricing, which allows you to switch to another housing loan package internally without incurring any administrative cost. Otherwise, this would normally cost you anywhere between $500 - $800.

In every situation, there will always be pros and cons. The same can be said of refinancing. Technically it would make sense to just go for the lowest floating rates each time and refinance only when interest rates start creeping up. However the truth is that there are always factors involved that will prevent one from doing this and still make financial sense.

1. Cost

Whenever you do a refinance, there are costs involved. Legal and valuation fees are the two most notable costs involved in this transaction, with legal fees forming the bulk of it. Banks do provide legal fees subsidies or cash rebates for refinancing, provided that your outstanding loan amount is of a “sizable” amount to them. As the outstanding amount gets smaller, it would rarely justify your decision to refinance to a lower property loan interest package in view of the cost outlay especially if you do not qualify for any form of subsidies or rebates from the new bank. These fees would usually amount to $1800 - $2500 depending on whether it's to refinance a HDB loan or a private property loan.

2. Lock In Period

Most home loan packages come with a 2 - 3 years lock in period whenever you sign up with a bank. If your refinancing takes place during this period of time, you will have to pay a 1.50% penalty to your existing bank together with the new cost involved in refinancing to a new bank. Such exorbitant fees will deter homeowners from making the switch and that is the whole point of a lock in period being implemented in the first place. However do note that you should start the refinancing process 3 - 4 months before your lock in period ends because of the 3 months notice period that comes with every refinancing request. Do not wait till the last day of your lock in period before initiating it, as this will mean that you might have to pay a higher interest rate for the next 3 months going into the new term with your existing bank.