Property Refinancing 101

Contrary to what most people believe, refinancing your property does not always guarantee more savings. In fact, you could end up spending more with all those upfront administration and legal costs associated with refinancing. Therefore, it is essential for property owners to do their homework before they decide to go ahead and refinance their loans.

What is refinancing?

Putting it simply, to refinance is to replace your existing property loan with a new one. Of course, the new housing loan usually comes with more favourable terms, such as lower interest rate and monthly repayments, as compared to the existing plan. This is also the main reason why people choose to refinance their housing loan.

How this works is that when your application for a refinance property loan with Bank B is approved, Bank B will proceed to pay off your existing mortgage with Bank A, and bring over the prior loan balance. In other words, you will only be servicing just one property loan at any one time.

While refinancing involves a change of bank, repricing, on the other hand, refers to refinancing with the same bank. Most banks usually offer a one-time repricing option, also known as “conversion”, where you can change housing loan packages at no additional cost. Therefore, when you notice the bank that lends you money is offering a new home loan package with lower interest rate, and you have yet to exercise your one-off repricing option, it might be a good time for you to consider repricing your existing plan.

Do bear in mind that the lock-in period still applies: if you reprice your loan before the lock-in period expires, you are required to pay any penalty incurred for changing your existing loan even though you did not change bank. Therefore, do not simply assume that your first repricing will be free. Make sure to verify the details with your bank prior to making any change.

Why and when do we need to refinance?

Refinancing is a very common practice in Singapore’s property industry mainly because there are no loyalty rewards for staying with the same bank, and that bank loans do not offer permanent fixed rates (the rates get higher after the third year). Furthermore, there are plenty of different home loan packages available in the market, hence, borrowers tend to be on the lookout for better loan packages, hoping to save more money.

As mentioned earlier, most plans come with a lock-in period of 2-3 years depending on individual banks’ loan packages, and the borrower will need to pay a penalty if he/she were to change the terms of the contract by cancellation, prepayment or conversion within this period. Therefore, before you decided to “jump ship” and go with another bank that is offering you more lucrative rates, do check that you are no longer subjected to the lock-in period.

For those who signed up for a bank loan before October 2012, you will need to make sure you are out of the 3-year clawback period too. If you refinance within the clawback period, you will need to pay back the subsidies (i.e. legal fees, valuation fees, fire insurance premium) given to you, which total around $2,000 to $3,000. What’s worse, after repaying the clawback fees to your previous bank, you would now have to pay another round of legal fees to the new bank as most of them no longer subsidise the legal fees under the new Monetary Authority of Singapore (MAS) rulings.

Assuming you are no longer subjected to any lock-in or clawback period, what are some sure signs to refinance? Firstly, we need to understand the interest rates with which the home loans are pegged to.

Most banks in Singapore offer home loans that are pegged to the Singapore Interbank Offered Rate (SIBOR). This is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the interbank market. It is administrated by the Association of Banks in Singapore (ABS) and quoted as 1-month and 3-month rate.

Less commonly used are the Swap Offer Rate (SOR) and Fixed Deposit Home Rate (FHR). SOR is an FX-implied rate reflecting the projected interest rate it will cost once the same amount of money is borrowed in US dollars. It is therefore dependent on what’s happening in the US economy. Currently, only the Bank of China and ANZ Bank offer home loan packages using the SOR, with the latter offering the COMBO option where an average of 3-month SIBOR and 3-month SOR is being used. FHR, on the hand, is influenced directly by the DBS bank’s FD rates.

Therefore, as a general rule, you should consider comparing home loan rates when you find yourself in the following situation:

– You are on a floating rate, while SIBOR/ SOR /FHR are on the rise

– You are on a fixed rate, while SIBOR/ SOR /FHR are declining

– You have not exercised your one-off option to reprice your loan

– You have a significant spike in personal income and would like to reduce your loan tenure to make higher payments so as to save on interest charges

How do I save with refinancing?

Refinancing is only worthwhile when your total saving on interest charges exceed the cost of refinancing within a recommended period of 12 months. For example, when you refinance from Bank A to Bank B, you need to pay an upfront legal fees of S$3,000 but you could reduce S$500 in your monthly installments due to lower interest rate. This means the real savings will kick in just after 6 months ($3,000 divided by $500 = 6 months), making it a good move to refinance.

It is also important to note that under the new home loan curbs, the maximum loan tenure is now capped at 30 years for HDB flats and 35 years for private properties, and this cannot be stretched by refinancing. In other words, after servicing a home loan for your HDB flat for 5 years at Bank A, when you decided to refinance a new loan at Bank B, the maximum loan tenure for the new package would only be 25 years (30-5=25).

Shorter loan tenures could possibly mean a higher monthly repayment, especially if you had a much longer loan tenure previously. In addition, you could end up with a higher Total Debt Servicing Ratio (TDSR) and not qualify for an approval to refinance. Therefore, if you intend to refinance, do refrain from taking up any other loans such as personal loan and car loan, so as to keep your TDSR in check.

With SIBOR and SOR on the rise in recent months, many property owners are tempted to refinance to a home loan with a low fixed rate. However, it is essential to understand that a housing loan is a long-term commitment, and you should always consider the loan packages as a whole (putting in mind its low interest rates for the first few years and “thereafter” rates) and not just focusing on the first 3 years, thinking that you can constantly refinance on the 4th year. You can never predict when unfavorable rulings will kick in and affect your refinancing options. Furthermore, if you manage to secure a decent thereafter rate, you can also save yourself the hassle of having to refinance your loan every three years.

Ultimately, refinancing is just a number game. Do your calculation and consider both the savings and costs involved before you make your decision. Understand that every home loan package comes with different terms and conditions, and it is beneficial to compare your home loan rates every 3-5 years even if you have no intention of refinancing it. This is simply to keep yourself updated with the latest offering in the financial market so as not to lose out on potential savings.

Article written by Praise Poh


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