Refinancing mortgage loans are in rage as soon as the interest rates drop, even by a fraction. But does it really make sense for homeowners to refinance? After all mortgage refinancing can, sometimes, be the worst thing you do. Here in this post, we will discuss how to slash your existing mortgage rates with refinancing.
When to Consider Refinancing?
Homeowners use refinancing to pay off their existing mortgage with a new loan, which usually has a lower interest rate. In general, such loan schedules are beneficial, when:
- Homeowners are offered a shorter loan term
- They can have lower interest rates
- They can use home equity to cover their large expenditures
It is a good idea to consider refinancing if you are paying 3% or more on your home loan, especially if your outstanding loan balance is less than your appreciated home value. Since this will lower the risk and make the property more lucrative for the lenders to invest in, you can have a much lower interest rate on your home loan.
However, it is recommended to consult the Singapore Interbank Offered Rate, or Sibor before you refinance your mortgage.
The following are the 3 most important things every homeowner in Singapore must know before refinancing their mortgage loans.
Cost of Refinancing
Just like any other loan, there are additional costs associated with refinancing apart from the interest you pay. There are legal fees as well as a penalty fee on your outstanding loan amount if you want to refinance the property before your lock-in period is over.
Therefore, it is important to consider that the costs associated with the new refinanced loan are rolled into the existing balance, which in turn, increases the loan amount.
Lock-in Period and Penalty Fee
Typically, the lock-in period on housing loans is between two and three years in Singapore. During this period, the homeowner needs to keep the mortgage with the bank; and redeeming the loan prematurely within this lock-in period will result in the borrower having to pay a penalty fee of 1% to 2% on their original home loan amount.
In addition, there are many other charges such as cancellation fees, tax on the new loan, processing charge, valuation fees, legal fees, and clawback of subsidies offered by the lender, etc. associated with early repayment. It is, therefore, advisable to opt for refinancing, only if your savings from the reduced interest rates are greater than your penalty charges.
Refinancing Mortgage Regulations
There are certain prevailing regulations on refinancing mortgage loans, irrespective of whether you are changing the bank or simply changing the pricing package. The Total Debt Servicing Ratio or TDSR is one such regulation that needs your full affordability assessment. In fact, it even takes all your present and future financial commitments into consideration. As per this framework, a borrower can spend not more than 60% of their gross monthly income on debt repayments and introduce to ensure the fact that the borrower(s) can actually afford the loan amount.
The good news is: The Monetary Authority of Singapore has made certain changes in this TDSR framework, due to which borrowers now have more flexibility in managing debt obligations. For example, TDSR is no more applicable to refinancing owner-occupied residential properties. Likewise, it is not applicable to someone who opted for a debt reduction plan and made a repayment of at least 3% of the outstanding loan amount for over three years (and not more).
But before you refinance your home loan, it is important to have a clear idea of the whole situation. Let’s start with the following questions:
- Will refinancing lower your home loan interest? If yes, by how much?
- What will be your new monthly installment payment after the refinancing?
- Is there an option to get cash outequity loan?
- Can you shorten your loan terms by a good few years?
- Are the costs of refinancing significantly lower than the savings you will make from it?
If your answers are “yes,” it makes perfect sense to refinance your existing mortgage loan. And here are some tips from us on securing a refinancing mortgage loan.
Consider Your Lock-in Period
As mentioned earlier an early repayment of your existing loan within the lock-in period will result in you having to pay hefty charges and penalty fees. But that’s not all. Any kind of loan prepayment comes with a notice period requirement. This means, you would still have to pay higher repayments for at least the next three months, even if your lock-in period has expired. The best time, therefore, is to finance your mortgage loan four to seven months before the lock-in expires.
Consider Your Tangible Benefits
Refinancing is especially a good option if there are tangible benefits associated with it. Additional opportunities for investment purposes or savings are some of the examples of such tangible benefits.
Switch Banks to Get a Better Offer
Of course, you can bargain with your current bank to bargain on your refinancing deal, but the best refinancing offer is likely to come from other banks. They will be more willing to give a better deal as it means acquiring a new customer for them. Remember that it doesn’t really pay to stay with your existing bank, so start taking quotes from different banks and see who gives you the best possible deal.
Navigate Your Loan-to-Value Limit
Loan-to-value ratios determine the maximum value of your property that a bank can finance. One way to reduce this ratio significantly is by having more than one existing home loans. Besides, there are other ways to reduce LTV ratios, especially if you own more than one property as a couple. For example, you can take out your spouse’s name out of the property or mortgage, especially if you earn enough to support the loan and your spouse too has a job. This will allow your spouse to take another loan and maximize the LTV limit for the second mortgage loan.
To wrap things up, you need to consider each and every aspect carefully before deciding to refinance your home loan. Of course, it has many positive impacts on your financial situations but things may change drastically for homeowners in Singapore if Sibor goes up suddenly by a certain level. So, consider your current financial situation carefully and decide if refinancing is worth the effort.