Just because you’ve purchased a home doesn’t mean that’s the end of your headache. There are heaps of things to think about after, and home loan refinance is one of them.
Refinancing is the process of changing the terms of your home loans. As interest rates are constantly changing, a good rate three years ago may not be a good rate in current times. In Singapore, it is common for home owners to refinance after the first three to five years (lock-in period). This period typically coincides with the stepping up of interest rates as well.
Most mortgage loans are structured such that the interests are low in the first two years in order to attract loan take-up. This applies to most of the loans regardless of it being pegged to either SIBOR, floating or fixed rates. Interest rates can easily jump more than a percent after the third year. If your loan is on an amount of $800,000, this increases the interest payment by $8,000.
Through home loan refinancing, your home loans are transferred from one bank to another. Sometimes, you may also notice a lower interest rate loan from the same bank you have borrowed from. Instead of refinancing, you can then choose to re-price your mortgage loan with the same bank. Most banks offer a one-time repricing option where you can switch loan packages at no cost. Or else, there could also be an administrative charge (usually around $500) to reprice your loan.
What should I consider before I refinance my home loan?
With interest rates looking to rise this year due to the end of Quantitative Easing in the United States, it may be time for you to look at the possibility of refinancing your mortgage loan.
Here are a few things to note before you consider refinancing:
- Lock-in Period Expiry
Loan packages usually come with a minimal lock-in period in which any cancellation during this period will incur a cancellation fee. The refinancing costs for fixed rate mortgages during the lock-in period could cost you around 1-1.5%.
Based on a $1 million loan, this comes up to a substantial $15,000. In this situation, you should not consider refinancing because the penalties will not justify your cost-savings.
- Clawback Period Expiry
When you sign up for a new loan, banks typically throw in lots of extra goodies, such as subsidies for legal fees, valuation fees and fire insurance premiums. Clawback periods are usually 3 years, which means if you intend to refinance within this period you will need to repay these subsidies.
- Notice period
Banks will also need you to give them a notice period for cancelling the loan without being subjected to a penalty. While this is not a major barrier, the more important implication is on the timing of your refinancing. If your lock in period ends in June, you will likely start researching on your refinancing options in March. When the time comes for you to refinance, interest rates might have already gone up.
So when exactly should I refinance my home loan?
- A loan with substantially better terms is available
The mortgage market is very competitive and banks come up with great offers frequently to outdo one another. A key advice is that any refinancing should save you money substantially – if you are on a loan of less than $300,000, you want to look for interest savings of at least 1%. Otherwise it might not be worthwhile to refinance. However, for huge loans of over $800,000, a small difference in interest rates can mean huge savings over the years.
- Changing the loan tenor
Changes in financial situations happen to everyone and there could come a time the high monthly installments is putting a strain on your financial situation. This is when you can consider refinancing to stretch out the tenor as you will be making lower monthly repayments.
On the flipside, you could have enjoyed a salary increase so you may want to reduce the loan tenor to make higher payments to save on interest charges.
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