It seems that the days of record-low interest rates are over.
In anticipation of further rate hikes in the US, Singapore banks have raised their interest rates for mortgage loans and this has caused concerns for homeowners as they will have to pay more for their monthly instalments, especially those with floating rates.
Therefore, the banks have been very aggressive in promoting home loan refinancing to homeowners.
In today’s article, we look at what is home loan refinancing, does it benefit you, the homeowner and what to consider when refinancing.
What is refinancing?
Home loan refinancing is when you switch your existing home loan to another bank or financial institution (FI). Homeowners refinance their home loans for several reasons, mainly to save money through a lower interest rate, extend the loan period or get a bigger loan amount.
If you own a property that is not fully paid up, be it an HDB flat or private property, you can do a home loan refinancing.
If you own an HDB flat, you can refinance the mortgage with a bank or FI. Once you have refinanced your HDB loan with a bank or FI, you cannot subsequently refinance that loan back with HDB.
If you own a condo or private property, you can only refinance it with a bank or FI. You cannot refinance a private property with an HDB concessionary loan.
The ultimate aim of refinancing is to get a lower interest rate on your home loan and save money in the process.
With interest rates ranging from 0.9% to 2.6% (both fixed and floating), it is certainly a wide range. So if you are currently on the higher end of that range, you can save a fair bit by refinancing your home loan.
With a lower interest rate, your monthly repayment will be lowered in the process.
Those on a fixed interest rate loan can convert to a floating rate loan by refinancing.
Fixed interest rate loans are usually locked in for a period of 1 to 5 years. During this period, you pay a fixed interest rate, which is usually slightly higher but it is more stable as you are not affected by market fluctuations.
Floating interest rate loans are subject to changes periodically and your monthly instalment changes according to the rate.
Due to changes in their financial situation, some people may want to shorten or lengthen the loan tenure.
Some may want to clear off the outstanding loan by shortening the loan tenure. Others may face cash flow issues and by lengthening the loan tenure, free up additional money for other important issues.
As your financial situation changes, you will need to ensure that you are not affected by the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) quotas.
For TDSR, your total debt cannot exceed 60% of your monthly income and this includes credit card bills, personal loans, car loans, study loans etc. For MSR, your monthly home loan repayments cannot exceed 30% of your monthly income.
Who can refinance?
Homeowners with loans not under the locked-in period can refinance.
This is important as there will be penalties to pay if you refinance before the lock-in period is over.
Most banks would require a notice period of 3 months if you want to refinance, so do your research and find the best packages before the lock-in period is over.
It is also important to know what is your outstanding loan amount, monthly payment amount and loan tenure. This information will come in handy when you are comparing packages for refinancing.
Most banks and FIs have their package details on their website but it is best to speak to their financial advisors or officers to have a better understanding and avoid any miscommunication.
Refinancing comes with legal and admin fees, so it is best to clarify with the banks/FIs before committing, otherwise your savings from refinancing will be offset by paying the various fees and hidden costs. Some banks/FIs do offer legal or valuation subsidies, depending on the loan amount taken.
Choosing the best package
When deciding on a refinancing package, you need to compare interest rates, tenure, lock-in periods, early redemption penalties and the various fees.
You should only do refinancing if you get to enjoy savings and pay a lower amount monthly.
Some banks/FIs offer lower rates for the first year and a higher rate subsequently, therefore you have to study the packages carefully to avoid making a wrong choice.
Lastly, as in all financial commitments, it is wise to do your due diligence and not rush into any decision that you may regret later.
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