For many individuals in Singapore, buying a house is the most significant call they are ever going to make. As a result, they would need to take a house mortgage from a bank, credit union, or a specialized mortgage lender. A typical house loan payback period is between 10, 15, or 35 years.
A home loan is basically money borrowed from the bank to help you buy a property. However, a home loan is a long-term financial commitment – typically spanning 20 to 30 years. With the interest rates set to gradually rise in 2022, homeowners are now considering options to lower their recurring monthly installments.
To save on mortgages, homeowners can consider refinancing their housing loans. But is it a good idea? Just like any financial decision, mortgage refinancing has its pros and cons. For one, it can help lower your monthly repayment rates, plus it allows you to change the loan term. Read on to find out more.
But First, How Does A Home Loan Work?
A residence loan is basically money borrowed from the bank to help you buy a property. The basic understanding we must have when applying for a house loan are the following:
- The property purchase is acting as collateral for the loan.
- Your eligibility determines the amount you are granted.
- When the initial down payment is made then the loan would be disbursed.
- From the first disbursement, you are charged interest.
As we know there are several types of house loans available, but four main factors typically define each house loan;
- The Principal Amount – This amount is derived typically minus the down payment made, minus the closing cost, and any other fees.
- The Loan Tenure – This defines the period in which you, as the borrower will be responsible for the loan tenure.
- The Loan Interest Rate – It refers to the annual amount you need to pay the lenders to borrow the money; this is based on the current principal balance.
- The Repayment – This would refer to the borrower’s agreed repayment of the loan. It would generally be monthly.
What Is Refinancing?
Before we dive in, let’s first understand what it means to refinance a home loan.
Refinancing means replacing your existing home loan package with that of another bank’s home loan. Homeowners typically consider refinancing when they are looking for lower mortgage interest rates. This can lead to more interest savings. Some refinance because they need extra cash – known as cash-out refinancing.
However, do not mistake refinancing for repricing. Repricing involves staying with your current bank but negotiating for a better interest rate or loan arrangement. Refinancing, on the other hand, means moving to a different bank.
Refinancing also involves additional costs, such as legal and valuation fees, administrative fees, and more. Despite these extra costs, refinanced home loans can lead to substantial savings.
So how much can you save by refinancing?
You can use online calculators to determine how much money you can save by refinancing.
Consider this example:
If they refinanced to a bank loan:
Say Mr. and Mrs. Ma bought a S$300,000 HDB flat. They financed this purchase with an HDB loan where their CPF covered the downpayment of S$45,000. They are paying for the remaining S$255,000 with a 25-year HDB loan at an interest rate of 2.6%. This means they are paying about S$1,157 per month in installments. Find out more on the maximum HDB loan amount you can accquire.
After five years, they have around S$207,000 remaining on their HDB loan. They are considering refinancing to a bank mortgage with a 1.5% rate fixed for the next 5 years. Let’s use an online calculator to compare the savings gained.
If they continued with their HDB Loan:
From the two calculations above, we can see that refinancing their HDB loan to a bank loan with a fixed 1.5% interest rate would lead to savings of S$145 per month.
|Monthly repayments without refinancing
|$1,225per month (with HDB loan)
|Monthly repayments after refinancing
|$1,080 per month (with new bank loan)
|Savings per month
|Savings over five years
Pros and Cons
Is refinancing your home loan a good choice? This depends on a homeowner’s unique situation. However, you can calculate your potential savings to help you make a smart financial decision. Additionally, here are a few pros and cons to refinancing home loans in Singapore:
- Lower Interest Rates: Lower interest rates will see many homeowners looking into the opportunity to refinance their existing home loans. When refinancing, homeowners can enjoy savings that they will obtain from mortgage expenses. The money which the borrower saves from refinancing can be used as an investment.
- Change Loan Term: Some homeowners consider refinancing because they are not satisfied with their existing home loan package. That said, they are looking for better home loan packages that will make repayments more affordable.
For example, they are currently in a 10-year repayment plan, but they decided to move to a 30-year repayment plan. Whatever the situation may be, refinancing your existing loan would solve the problem.
- Fixed Repayment: Another benefit that many borrowers find when refinancing their current home loan with a fixed rate option is its fixed rate, meaning the monthly installments remain similar.
If the proceeds from the home loan are being used to get cash out, it is likely to be cheaper than securing personal loans or maxing the credit card balances. Once the mortgage is set, the amount of the payment would then remain the same.
- Cash-Out Refinance/ Refinance Cash Out: Some homeowners may have enough equity accumulated in their house refinance to cash out their investment and obtain a lower interest rate.
- Transaction Cost: Refinancing, without the help of mortgage specialists, can be a costly experience if you fail to do your homework on monthly installments and loan interest, among others.
For one, if you’re refinancing your home loan, then be prepared to pay for additional costs, such as transaction costs. This cost may vary between lenders but you must be prepared to pay a significant percentage of the outstanding principal.
On top of that, you may also need to pay for an appraisal, inspection fee, or even evaluation fees. These fees could add up and may end up costing the borrower a hefty expense.
- Higher Interest Cost: This may not always turn out as you plan. You pay more interest rates on your loans when you spread out payments across an extended period. You may enjoy lower monthly payments, but the higher lifetime cost of borrowing could offset that benefit.
- Lost Of Benefits: Some loans have useful features which are removed if you proceed with a refinance. For example, some loans may provide you access to the lower interest rate on personal loans.
On the other hand, some loans like a fixed-rate loan, might be ideal if interest rates skyrocket soon even though you might temporarily get a lower rate with a variable-rate loan. So it is always good to find out some key features of your current home, before proceeding with refinancing.
Is It a Good Time To Refinance Mortgage in Singapore?
According to reports, mortgage rates in Singapore are expected to increase by a “few times” in 2022. That said, home loan refinancing must be a strategic move. So when is the best time to refinance?
Typically, the best time to refinance is every two to three years. However, this will depend on your existing mortgage. Most home loan packages in Singapore increase the interest rates by the third year when the lock-in period is over. But you don’t have to wait for the end of your lock-in period to consider refinancing.
Here are a few things to consider:
- Lock-In Period Ending: Most banks require a 3-month notice before you refinance your loan. For this reason, you need to know when your lock-in period will end. Start your refinancing journey at least 4 months before you’re charged with the new interest rate.
However, some banks may charge a penalty fee if you choose to refinance mid-way through your lock-in period:
- Is There A Better Home Loan Package? Home loan packages are updated from time to time. That said, even if your current home loan is a good deal, it won’t stay that way forever. So when it’s time to refinance, make sure that your loan package is at least 0.5% less than your current one.
- Extend Loan Term: If you’re considering refinancing, make sure that you have not maxed out your current home loan tenure. So if your current loan tenure is 25 years, you can refinance for up to 30 years. This will help lower your monthly repayment. However, it will also increase your overall costs.
Step by Step Guide to Refinancing Private Property
As you have read above, refinancing could be beneficial to you as a borrower but the key is to totally understand what you are getting yourself into. Being vigilant to know your options available is key.
Here, is a step-by-step guide for you to help you refinance your home loan
Step 1: Understand Your Current Home Loan Agreement
To start your home loan refinancing process, you should first prepare all the details you need about your current mortgage. That will help make the whole refinancing process easier. Some of the details you will have ready include the unpaid credit balance, monthly principal amount, term, loan interest rate, any costs and taxes, advance payment penalties, and overall loan package.
Step 2: Do Research on the Best Available Home Loan Refinancing Available
You can then do your research on the available home loans using your information on hand. You can check out the LoanAdvisor website to get the board rate or an overview and compare the home loan packages currently available on the market. The best interest rates for home loans are conveniently matched with just a few clicks.
Step 3: Get Help
Seeking credible and qualified advice on house mortgage refinancing in Singapore can be as simple as engaging and speaking to a mortgage specialist. A mortgage specialist will advise you on costs that are incurred during home loan refinancing. Some expenses include appraisal fees and legal fees, and if you refinance your mortgage during the lock-in period, you will be assessed a penalty of up to 1.5% on your new home loan. Having a mortgage specialist, he/she will inform you of all the necessary details when switching to a different bank loan, which includes the costs.
Step 4: Get Your Home Refinance
The very last phase will be applying for your new home loan. Note that you should apply for your new home loan at least 4 months before your current lock-in period for home loan expires. For the processing requirement, you would need enough buffer time and a 3-month notice. The earlier you prepare, the better, so you can take ample time to address the issues that may arise during the home loan refinancing process
Refinancing HDB Loan to Bank Loan
Can you refinance your HDB loan?
Yes, you can. However, there are a few factors you need to consider when refinancing your HDB loan to a bank loan:
- Mortgage Servicing Ratio (MSR): This is the portion of your gross monthly income that goes towards repaying your property loan. MSR is capped at 30% of your gross monthly income.
- Total Debt Servicing Ratio (TDSR): This is the portion of your gross monthly income that goes towards repaying other monthly debt obligations. TDSR must be 55% or below your gross monthly income
- Loan-to-Value (LTV): The bank’s LTV limit of up to 75% will apply when you switch from an HDB loan to a bank loan. Say you have not repaid at least 25% of your property’s purchase price, you may need to pay extra cash or CPF to meet the LTV.
- The Bank’s Eligibility Criteria: On top of all these, you also need to meet the other eligibility criteria set by the bank. For example, you need to meet the minimum income criteria.
Steps to Switching From an HDB Loan to a Bank Loan
Step 1: Compare Mortgage Rates and Home Loan Packages Available
Take your time comparing the different home loan packages on the market. Aside from the interest rates offered by different banks, you must also consider the perks and incentives.
Step 2: Prepare The Necessary Documents and Apply
If you found a bank loan that suits your needs, you need to prepare the necessary documents. The most common requirements include your:
- Copy of NRIC or passport
- HDB flat details
- HDB financial information
- Latest outstanding loan statement
- Latest Central Provident Fund (CPF) Property Withdrawal Statement
- Latest Notice of Assessment
- 12 months-worth of CPF transaction history
- Latest 3 months-worth of payslips
- Employee contract – this is required if you have less than 3 months of employment
- Tenancy Agreement
Step 3: Valuation Assessment
During the loan application process, the bank will perform an assessment to determine the value of your property. It is typically done by a qualified surveyor sent by the bank. During this valuation assessment, they will determine your property’s market value using a set of metrics, such as location, property size, age, condition, and more.
Step 4: Hire a Property Lawyer
Refinancing your HDB loan to a bank loan will take time. Instead of handling everything yourself, you can consider hiring a property lawyer. He or she can take care of all the nitty-gritty details as well as the paperwork involved.
What Is Cash-Out Refinance?
A cash-out refinance is an extremely smart and sneaky way of getting huge loan capital from your house. In a nutshell, it is when you build up enough value on your current house and place it as collateral for a loan. It basically allows you to unlock capital tied in your property, without having to actually sell your house.
The cash-out refinance amount from your house is determined solely on two factors. The first factor is the current outstanding of your current loan and the second factor would be the current evaluated value of your house.
For Example: Let’s say about 15 years ago, you manage to obtain a fair size private property for around S$ 800,000, and over the 15 years, the surrounding had been mass development, and currently based on the current evaluation, your property has an estimated value of S$. 2.0 million and over 15 years, you have managed to bring down your home loan to S$ 250,000.
Now, let’s say you are allowed to be part of an investment not to be missed, therefore you now could proceed by doing a cash-out refinance of your current house. This would mean that with the value of the house being appreciated, you are now putting that place as collateral for a cash-out refinance.
On average a cash-out refinance can provide you with 75% of the current evaluation value of your property minus any outstanding loan amount that may still be attached to the property. There, the amount you cash out would be
(75% of S$2.0 = S$1.5 million) – (S$250,000 outstanding loan) = S$1.25 Million
The amount in hand is likely more than what you could normally borrow. A cash-out refinancing definitely benefits owners of private property more compared to those who had purchased HDB flats.
Cash-Out Refinancing Cost
As an individual, you have to understand that to process the legal fees for cash-out refinancing could cost as much as S$3,000 or more. Further, you may need to pay for other expenses like a house assessment, which could lead to cost even more. Although the interest rate is low, the cost of these additional fees should be taken into account when considering cash-out refinancing.
It can be difficult selecting a suitable package but homework needs to be done. Sometimes you may spend weeks scouring bank websites and shortlisting packages, just to acknowledge you’re not saving so much from a particular package you’ve been observing.
In summary, cash-out refinancing is merely good if your property value is significantly higher than the current outstanding of your existing housing loans in Singapore.
Frequently Asked Questions
Can You Refinance an Existing Home Loan?
Yes, you can. Some homeowners choose to refinance their existing home loans to save on interest. You can look for home loan packages with lower interest rates. Another option is to choose a loan package with longer tenure to spread out your monthly installments.
How Long Should You Wait Before You Refinance Your House?
Refinancing is typically done during the 4th year of your home loan or after. However, this may depend on your lock-in period. For instance, if your interest rates will change after 3 years, it’s time to start looking for a new loan plan before you’re charged with the new rate.
Where To Find the Best Rates for Refinancing?
Before you refinance your home loan, start by comparing different mortgage rates. For one, you can look for a mortgage broker or look into different banks and their current housing loan plans.
There are online loan comparison tools that will help you compare the top loan packages. Doing so will help you find the best terms and interest rates.
Refinancing vs Repricing
Refinancing involves closing your current home loan account and switching to a completely different bank. When refinancing, the homeowner will take up a new housing loan with a different interest rate. Banks usually offer deals to new customers by providing a more attractive home loan interest rate and low switching costs.
Repricing involves changing to a different mortgage loan plan within the same bank. This is your chance to negotiate better interest rates and terms. However, there is usually a repricing fee of around S$800 to S$1,000.
Additionally, repricing allows you to immediately enjoy the new loan package within a month. Refinancing, on the other hand, usually takes effect at least 3 months later.
If you’re looking to save on mortgages, refinancing your existing home loan is a good option. For one, choosing a housing loan with a lower interest rate can lead to interest savings in the long run. Refinancing also allows you to change the loan term to help alleviate the financial burden.
- Refinancing means replacing your existing home loan package with that of another bank’s home loan.
- Refinancing also involves additional costs, such as legal and valuation fees, administrative fees, and more.
- You can refinance your HDB Loan to a bank loan. However, there are a few factors you need to consider, such as your Loan-to-Value limit, Total Debt Servicing Ratio, and the bank’s eligibility criteria
Thinking of getting a loan for extra cash? Compare the best loan rates on Loan Advisor. This loan comparison tool has the best interest rates and loan terms from the top licensed moneylenders. Request up to three loan quotes today for free to find the loan package tailored to your needs.