Things to Know Before You Refinance Your Mortgage
Over the past 5 years, refinancing has become increasingly popular among those who have taken up a loan for their new property due to the falling interest rates in the market. Refinancing is a method to decrease the interest rate paid by switching to another home loan package, be it with the current bank or a new bank.
In most cases, refinancing is done on the 4th years onwards as most home loan packages will raise their interest rate in the 4th year. Home loan packages are usually pegged to either the Singapore Interbank offered Rate (SIBOR) or Swap Offered Rate (SOR) rates in Singapore. The more widely use loan packages are 1M SIBOR and 3M SIBOR. This means that the interest rate will be refreshed every month or every 3 months respectively.
1 Month Sibor (image from sibor.sg)
3 Month Sibor (image from sibor.sg)
In Feb 2021, the 1M SIBOR rate is 0.25% while the 3M SIBOR rate is 0.44%, this rate was constant for the past 6 months. Although the SIBOR rates did not have much changes, there are several reasons consider before you refinance your home loan.
1. Cost of refinancing
Before refinancing, be sure to calculate the additional fees that you will have to pay to settle the paperwork. This includes:
· Cancellation fees (0.5% - 2% of outstanding loan)
· Legal fees (0.4% of loan amount)
· Prepayment penalties (0.75% - 2% of loan redeemed)
· Valuation fees ($700 - $1,000)
· Penalty fees (if appliable; read the next point)
In total, the cost for refinancing can come up to $2,000 to $3,000, excluding the penalty of breaking the lock-in period.
2. Lock-in period of your home loan
Lock-in period is a period where borrowers will have to keep the mortgage with their current bank. Most loans have a lock-in period of one to three years. By switching to another loan package before your lock-in period is up would mean that you will have to pay a penalty of around 1.5% on the outstanding loan.
Adding this onto the cost of refinancing might make it not worth to spend the time and effort to switch over to another home loan.
3. Repricing could a better alternative
An alternative to refinancing is repricing. What makes repricing different is that you will be taking the loan from the same bank, instead of getting a new loan from a new bank.
Most people do not know is that some banks offer the option of a “free” repricing. The only charges that you will have to pay is the administrative fees, which can cost around $500 to $800. Compared to refinancing, this amount is significantly lower by a few thousands.
Another advantage of repricing is the shorter time needed to switch over to the new loan package. This is largely due to the fact that your bank already knows how well you are doing financially, and it will do away with the time needed to review your documents again.
4. Thereafter rates
During the first 3 years of the loan, the bank spread will tend to be lower than that of the 4th year onwards. Before going straight into refinancing, be sure to check the spread for the 4th year and thereafter.
For instance, you are currently on your 4th year of current loan package, with an interest rate of 3M SIBOR + 1.0%. The new loan that you are planning to refinance into has an interest rate of 3M + 0.8% for the first 3 years and 3M + 1.2% for the 4th years onwards.
Using the above example, we can see that from the 4th years onwards, the loan that you are planning to refinance into would be costlier than your existing one. In this case, you should not refinance and should stick to your current loan package.
5. Complicated T&Cs of loan package
Besides SIBOR pegged and SOR based home loans, there are also other types of less common loans available:
· Interest offset loans – saving interest rate is used to reduce your mortgage rate
· Loans using board rates – interest rates set by the bank internally
· Private banks’ loans
These types of loans come with terms and conditions that one will not see in the typical home loans. There is no, or relatively low, transparency as to how the interest rates are set. An example would be the bank increasing their board rate despite the economy downturn. More importantly, the banks are only required to give you a 30 days’ notice in advance.
It is important to know what kind of loan package you are signing up for as the loans that uses board rates might come under other names – prime rate, home rate, mortgage rate, etc.
It is indeed tough to decide whether to refinance to a “cheaper” home loan. In this period of falling interest rates, do not be fooled into thinking that refinancing is the best option.
Be sure to calculate the costs of refinancing into the new loan (including the penalty fees for breaking the lock-in period), look at the interest rates from the 4th year onwards, ask your bank for repricing options, and understand the terms and conditions to the loan package fully. Disclaimer: The information is not advice and should not be treated as advice. You must not rely on the information in this blog. If you have any specific questions about any such matter you should consult an appropriately qualified professional for more information.
William Lee / Eileen Au
Ideal Home is well-liked by both local and international clients for their friendly yet professional approach in the way it goes about helping them with their real estate goals in Singapore. They welcome the opportunity to have a no-obligation chat with you to see how they can help you to achieve your real estate goals in Singapore.
Contact us today @ +65 8666 4333 (William) or +65 8686 4333 (Eileen).