Refinancing Your Home Loan
Interest rates are rising in Singapore, and if you got your mortgage loan 2 or 3 years back, it could be time to refinance your home loan before rates climb further. We’ve enjoyed low interest rates for the last 4 years, but as US is considering raising rates, the unevitable impact is that interest rates will rise in Singapore as well.
What Exactly Is Refinancing?
Refinancing is the process of changing the terms of your home loans. Most of the time, it is done as a respond to changing interest rates in Singapore so that you do not end up paying for a higher rate than you should. It could also be for the simple fact that you aren’t satisfied with your current bank for their service standards.
In Singapore, it is common for home owners to refinance after the first three to five years (lock-in period) as there’s usually a stepping up of interest rates by the banks after this period. Most mortgage loans are structured such that the interests are low during the first few years of lock-in period in order to attract sign-ups.
Factors To Consider Before Refinancing
Monitor your Lock-in Period
Some borrowers only realise that their loan’s lock in period is coming to an end when the letter from the bank arrives. By then, you’d need to contend with a higher payment for at least the next three months due to the notice period requirement. To avoid this, you should start to research for another loan about 4 to 5 months before and decide one one before the higher rates for your current loan kicks in.
Refinancing during the lock-in period is generally not recommended because you will incur a cancellation fees and right of clawback and these extra charges will most likely not justify your cost-savings from refinancing.
Beware of the TDSR
The Total Debt Servicing ratio(TDSR) was introduced in June 2013 by the Monetary Authority of Singapore(MAS) to prevent borrowers from becoming financially overextended because of your property purchase. The TDSR – which limits home loans to 60 per cent of a borrower’s gross monthly income – has made refinancing difficult for some homeowners. This is because you’d have to go through the whole process of credit checks and tighter loan restrictions.
If you have taken up extra loans or debt after your initial mortgage loan, you might want to re-look at your finances to ensure you qualify for refinancing. It’d be great if you can pay off some of these debts months before you apply for refinancing so that they show up in your credit report.
You Might Consider Repricing Instead
When you reprice your mortgage loan, you stay with the same bank but take up a different loan, which is usually a better offer than the initial one. The key benefit of choosing to reprice instead of refinance is that you can avoid the extra paperwork and legal fees.
A smart way to reprice is to choose a shorter loan tenure for your new loan. For example, let’s say you took up a S$600,000 home loan for 30 years, at an interest rate of 1.5%. Your monthly mortgage would set you back by $2,070.72 and you would expect to pay a total of $145,459 in interest payments over the period.
Assuming you had borrowed the same $600,000 at the same interest rate of 1.5%, but over a shorter loan term of 25 years. The total interest payment would amount to abount $120,000, saving you more than $25,000 in the process!
Refinancing and repricing your mortgage loan can help you to reduce your mortgage payment over the long term since interest rates can change substantially within a few years. If you prefer a more convenient solution, a reprice is probably more suitable for you.
So if you’re looking for the best Home Loan in Singapore, then check out the EnjoyCompare home Loan comparison tool and let our experts help you find the best mortgage.