Ready to Refinance

Reasons to Refinance

Are you considering to refinance? Have interest rates fallen? Or do you expect them to go up? Would you like to switch into a different type of mortgage?

The answers to these questions will influence your decision to refinance your mortgage. But before deciding, you need to understand all that refinancing involves. Your home may be your most valuable financial asset, so you want to be careful when choosing a lender and specific mortgage terms. Remember that, along with the potential benefits to refinancing, there are also costs.

When you refinance, you pay off your existing mortgage and create a new one. Refinancing may remind you of what you went through in obtaining your original mortgage, since you may encounter many of the same procedures–and the same types of costs–the second time around.

Lowering your interest rate

The interest rate on your mortgage is tied directly to how much you pay on your mortgage each month–lower rates usually mean lower payments. You may be able to get a lower rate because of changes in the market conditions improved. A lower interest rate also may allow you to build equity in your home more quickly.

For example, compare the monthly payments (for principal and interest) on a 30-year loan of $500,000 at 3.5% and 4.0%.

Adjusting the length of your mortgage

Increase the term of your mortgage:
You may want a mortgage with a longer term to reduce the amount that you pay each month. However, this will also increase the length of time you will make mortgage payments and the total amount that you end up paying toward interest.

Decrease the term of your mortgage:
Shorter-term mortgages–for example, a 20-year mortgage instead of a 30-year mortgage. Plus, you pay off your loan sooner, further reducing your total interest costs. The trade-off is that your monthly payments usually are higher because you are paying more of the principal each month.

For example, compare the total interest costs for a loan of $500,000 at 4% for 30 years with a loan for 20 years.

Changing from a Floating-rate mortgage to a Fixed-rate mortgage

If you have a floating-rate mortgage (SIBOR, SOR pegged), your monthly payments will change as the interest rate changes. With this kind of mortgage, your payments could increase or decrease.

You may find yourself uncomfortable with the prospect that your mortgage payments could go up. In this case, you may want to consider switching to a fixed-rate mortgage to give yourself some peace of mind by having a steady interest rate and monthly payment. You also might prefer a fixed-rate mortgage if you think interest rates will be increasing in the future.

Getting a Floating-rate mortgage with better terms

If you currently have a floating-rate, will the next interest rate adjustment increase your monthly payments substantially? Example from year 2 to year 3. You may choose to refinance to get another floating-rate mortgage with better terms. For example, the new loan may start out at a lower interest rate. Or the new loan may offer smaller interest rate adjustments.

Getting cash out from the equity built up in your home

Home equity is the dollar-value difference between the balance you owe on your mortgage and the value of your property. When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment (this is called a cash-out refinancing). You might choose to do this, for example, if you need cash to make home improvements or pay for a child’s education. Because you are using your property to get a loan, do make sure you are confident in making the monthly payment. If you missed your payments, you may risk losing your property. Home equity loan is only applicable to private residential property and not HDB flats.

When to Refinance

When is it the right time to consider refinancing your mortgage loan? For many homeowners in Singapore, their housing loans take up a sizeable chunk off their monthly income. Many home buyers will, as a consequence, go for the most extended tenors and stretch it to the maximum 25 to 30 years.

For many of singapore’s housing loans, refinancing is an essential way to reorganise your finances. However, timing the move is crucial. So, how do you know when to refinance your loan? Below are three essential elements that will guide you.

When the Lock in Period for the loan Has Expired

Before you consider refinancing your home loan, check the existing loan package. Most lenders in Singapore have embedded a lock-in period in the loan contract. During the lock-in period, any attempt to refinance would attract hefty charges, penalties and withdrawal of any subsidies or discounts you may have received in your current home loan package.

Most banks set the lock-in period at between one to three years after the receipt of the loan – which is not such a long time to wait.

When You Get a Better Deal from another Bank

Refinancing a home loan is essentially taking your credit to another bank. But you shouldn’t do this unless the competing bank has a better deal on the table. Banks, like other business organisations, respond differently to market changes and have different strategies to attract and retain customers.

Although you may have taken up the loan with your current bank years ago, it could be profitable to refinance your mortgage loan. Most banks structure their loans such that they have low-interest rates during the earlier years. This is a way to attract customers to purchase their products. During the later years, the prices rise but the lock-in and legal clawback periods will have expired.

Calculate your refinance installments using our Refinance Calculator.

Costs of Refinancing

Before you take the plunge, here’s more on the fees that apply when refinancing a housing loan in Singapore.

If You Are Yet to Exhaust Your Lock-in period – Prepayment Penalty

Some banks to refer to it as the “commitment period”, while others call it the “lock-in period”. If you have yet to exhaust this time lapse as stipulated in your mortgage loan contract, banks will levy a fee of approximately 1.5% of the outstanding loan amount. It is also known as a prepayment penalty. As the name suggests, the fee is punitive and penalizes the borrower.

Cancellation fees

You could have purchased a house through a new housing development, and the building is yet to be issued with a Certificate of Statutory Completion (CSC). In such a case, the bank will not disburse your loan in full.

Ensure that you are thorough on what costs you will incur when refinancing the housing loan. However, you will incur cancellation fees, like how you would incur a penalty for prematurely cancelling any other contract. Cancellation fees often range between 0.75% and 1.5% of the amount yet to be disbursed.

Legal charges

All mortgage loans attract legal charges due to the amount of paperwork and intricacies of mortgage contracts. Refinancing a mortgage loan in Singapore often means going through the same paperwork all over again. If your loan value does not attract sufficient interests for the bank to consider subsidizing this fees, you will incur legal charges afresh.

Legal fees range from between $ 1,800 for HDBs and $ 3,000 for private properties and what’s worse, in 2012 the Monetary Authority of Singapore (MAS) set in rules to make it more difficult for banks to give subsidies for residential homes.

Clawback fees

Where your bank has extended a legal subsidy for your mortgage, taking steps at refinancing your mortgage loan in Singapore, will prompt the bank to levy clawback fees. Clawback periods (different from lock-in periods) are like temporary guarantees you give that you will retain the facility with them for helping you offset the legal charges.

Typically, claw back periods last about three years, and if you refinance your housing loan in Singapore before fulfilling this period, the bank is entitled to “clawback” the legal fees.

Legal Fees

Clawback fees are paid to your previous lender. However, the facility will still need to go through various legal processes with your new lender. The new lender will engage a conveyancing lawyer to handle this work whose charges often exceed $ 2,000. Fortunately you can pay by cash or through funds in the CPF OA.

Valuation fees

Refinancing housing loan in Singapore requires that the new lender evaluates the property’s value once again. Depending on the value and type of property, the new lender will charge a valuation fee.

Frequently asked questions

Refinancing means taking a new home loan to pay off your current mortgage.

Before refinancing, borrowers should consider their financial situation over the next three to five years. You should ask yourself whether flexibility (no lock in period), a lower interest or predictable interest is the goal. It is also wise to consider if there will be any significant changes to your financial situation. Examples, a change in job, a new child or plans to sell the property.

There is a range of reasons when refinancing makes sense.

  • Your current interest rate is no longer competitive.
  • You are switching from a variable home loan to a fixed home loan or vice versa.
  • You like to draw home equity to pay for renovations, child's education or investments.
  • A major change in your financial situation

Refinancing is not easy. You need to consider all these factors, discuss them in details with us before deciding whether the cost of refinancing your private property or HDB flat is worth it. We can help.

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