Refinancing considerations

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Your current housing loan is probably secured by a mortgage of your home based on the promotional rates offered by the bank at that time. Interest rates would have remained low during the first few years, but subsequently the rates would have gotten progressively higher. If you are concerned about paying more interest on your existing home loan, there is a reprieve available for you now.

 

A recent clarification by the Monetary Authority of Singapore (MAS) now allows homeowners to enjoy substantial savings through substituting their existing loans with those offering lower interest rates. In this article, we will guide you through several issues when planning the re-financing of your property as well as to discuss the impact of the MAS clarification.

Under the new directive from MAS, homeowners can now switch their entire homeĀ loan to another bank even if the new loan quantum exceeds 80% of the current valuation of the property. MAS also clarified that its May 1996 directive on the 80% loan-to-value limit applied only to new housing loans.

What this means for existing housing loan customers is that they can now enjoy interest savings by replacing their existing loans with those that offer lower, fixed interest rates. In fact, nearly all consumer banks currently have something attractive to offer in relation to refinancing properties.

Here is a simplified example to illustrate the savings that can result from refinancing your property. Assuming you purchased a property four years ago for $1 million, using $300,000 from your CPF and borrowing the remaining $700,000, you would probably have an outstanding loan of $600,000. Assuming also that the current value of your property has dropped to $900,000, 80% of that would have been $720,000. Your bank can only lend you $420,000 because the $300,000 from your CPF is included in the $720,000. But with the MAS clarification, your bank can now lend you the full outstanding amount of $600,000 in a re-financing package. In closing, it is wise to review your own financial arragment and enter into negotiations with your bank(or other banks) as soon as possable in order to reap substantial savings for yourself.

When approaching a bank for a fresh loan to refinance the property It might be useful to note the following points.

1. The bank would always seek the opinion of a licensed valuer on the current valuation of the property at the time of your – application for a loan.Under the new directive from MAS for refinancing of properties, the bank is now able to lend up to 10O% of the current value of the property which includes the amount of CPF funds utilized at the time of application. It might be a good Idea to check the amount of CPF funds used for the purchase of the property first before approaching the bank.

2. The bank may want to know your credit and banking history. You may have to furnish copies of your bank statements reflecting the promptness of your re-payments for the bank to assess your general creditworthiness. The bank would also require your income tax assessment statements for the last few years.

3. Generally, homeowners are not in a position to negotiate the interest rate for the loan but merely have to decide on which package offered by the bank is the most suitable for his specific circumstances. In order to attract customers, some banks offer low fixed rates of interest for the initial few years and thereafter, at the bank’s prevailing lending rate. Most property owners like such packages because they serve as a buffer against any drastic movements in interest rates for the initial few years.

4. You should also be aware that banks can impose a penalty for capital reduction or full repayment of the loan within a predetermined period of time. As a general guide, banks impose a penalty ranging from 0.5% to 1.5% of the loan quantum for such sums repaid during the first few years of the loan from the date of the loan disbursement.

5. You can check with your current bank to review your financial arrangement. It is possible that your bank allows its existing customers to convert to the “new package”. You may thus get to enjoy the promotional interest rates offered by your existing bank without too much hassle and trouble.

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