Refinance home loan basically refers to the act of taking your existing housing loan and refinancing it through either paying off the existing loan or replacing it with a new one. This new loan will have a new set of terms and conditions of borrowing.
For a borrower to reconsider a refinance option, it is very likely that they are looking for a lower interest rate compared to what they are getting right now. The refinance can be from with the existing bank which their mortgage is from or from an entirely new bank or financier.
A consideration for refinancing is usually done when you hit the 4th year of your home loan or after. The reason is that some historical data shows that a typical home loan package raises interest rates after 3 years. Therefore, a few would take this opportunity to look out for better deals.
Another reason that we would see people looking to refinance their existing house loan, is due to the changes in Singapore InterBank Offer Rate (SIBOR) and Swap Offer Rate (SOR) rates. Between SIBOR vs. SOR, SIBOR is always the most stable option, therefore it’s good to know and understand how house mortgages are impacted.
Furthermore, refinancing house mortgages comes in three (3) varieties – rate and term, cash-out and cash-in. To choose your best refinance type is to understand the needs of your circumstances.
How Does Home Loan work?
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 residence loan is basically money borrowed from the bank to help you buy a property. The basic understanding we must have when applying 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 or amount of borrowing. – 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 agreed repayment of the loan. It would generally be monthly.
As a borrower, we should also be aware that from an interest rate perspective, you have an option — fixed rates or floating interest rates. The key difference between them is;
Fixed Interest Rate
The bank guarantees you a fixed rate for a period of time. This fixed rate can be anywhere between one year to five years. Banks are in the business of borrowing money at a lower interest rate, and then lending them out at a higher interest rate, to guarantee a fixed interest rate for a period of time is considered a risk for them. As such, most banks are likely to charge you a higher interest rate premium than floating rates.
It’s also important to note that fixed rates are only applicable for a period of time.
Floating Interest Rate
The floating rate is an interest rate that changes based on the benchmark rates that they are tied to. In Singapore, there are two types of rates that are usually being used which are the Singapore Interbank Offered Rates (SIBOR) and the Singapore Swap Offer Rate (SOR).
Most banks will charge the floating rate or interest rate plus a margin. For example, a house loan could be quoted as a 3-month SIBOR + 0.5%. This means you pay whatever the interest rate is for the 3-month SIBOR (e.g. 1.0%) + 0.5% for a total of 1.5%.
Advantage of Home Loan
House loan Singapore enables you to get ownership of your house. For many of us, it can be stated that the housing loan Singapore is the largest refinance on home loans in our lives. We incur substantial debt for years once we signal for the home loan. It’s in no way been easy to convince the lender and take a home loan. However, because the borrower receives the chance to pay the home loan over many years, it indeed turns into a more low cost and manageable for them.
A home loan is also a cost-effective way of borrowing cash because the interest rate is notably lower in assessment with a different home loan due to the fact it is secured against the house. The lender or bank has the security due to the fact if the whole lot is going wrong and the lender cannot repay, the bank can still promote the property and collect the mortgage.
Disadvantage Of Home Loan
You will need to pay back heaps extra money than the particular borrowed quantity. You’re carrying an enormous amount of debt over a substantial amount. This is the foremost distinct disadvantage of a mortgage. Another downside is that you can either pay off the entire quantity with an interest rate on time; otherwise, you might lose your house’s possession.
The borrower must exert for years to pay off the loan, and if the house-owner fails to pay back the loan amount, the loaner can repossess the property. The loaner or bank can sell the house and collect the money. It should appear the monthly instalments are cheap for you; however, the particular payment you may build over the years are going to be significant.
Why Home Loan Refinance Is Potentially Good
When the borrower of a loan has come to a factor the place the terms of the first loan are unacceptable or more costly than they need be given the present-day monetary condition, the borrower can choose to refinance the loan.
In this situation, the first loan is paid off, and the loan is changed with a new loan. In many ways, a refinanced loan is like a brand new loan obtained from scratch when you consider that the new lender should accept the loan equity, appraised value, and potential to repay.
Reason For Refinancing
Why should you refinance your place? It is a known fact that interest rates are lower than they have been in years due to recent pandemic. With the lower interest now and over the next 3 months, this would be a perfect opportunity to consider refinancing.
Here are some other reason that one may consider refinancing their home loan;
a) Lower Interest Rates
Lower interest rates will see many homeowners looking into the opportunity to refinance their existing home loan. Why? The reason for them applying to refinance their current mortgage is to take advantage of the savings which they will obtain from mortgage expenses. The money which the borrower saves from refinancing can be used as an investment.
b) Make House Improvements
Many home buyers will soon realize maintaining a house can be hard work and expensive. The minor to significant house improvement cost for a house can drive expenses high for a borrower; therefore when pursuing a refinancing option will be a better option to access quick funds. Furthermore, taking a personal loan for any house improvement needs will also yield a higher interest rate and additional financial responsibility.
c) Change Loan Term
A vast majority of residence loan borrowers tend to look into refinancing their residence loan because they are not satisfied with their current program or felt that they could get a better interest rate elsewhere after being rejected by their existing home loan banks in Singapore. Another reason for the change could be that they are currently a 10-year repayment plan, but they decided to move to a 30-year repayment plan. Whatever the situation may be, refinancing your existing home loan would solve the problem.
d) Fixed Repayment
Another benefit that many borrowers find when refinancing their current home loan with a fixed rate option is its fixed-rate or the monthly instalments remains 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.
e) 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.
Risk of Home Loan
When we take a look at home loan refinancing, it does make sense, but you have to understand that to refinance a home loan may not always be the smartest money move, there will be some drawbacks;
a) Transaction Cost
Refinancing, without mortgage specialist, can be a costly experience if we do not entirely do our homework on monthly instalments, loan interest, among others. Transaction cost, although may vary from lenders, you must be prepared to pay a significant percentage from the outstanding principal in the refinancing fee which can be from the appraisal, inspection fee, or even evaluation fees. This fee could end up costing the borrower a hefty expense.
b) 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.
c) 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 or some loans like a fixed-rate loan might be ideal if interest rates skyrocket in the near future 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 a refinancing.
Cash-Out Refinance – How Much Money Can I Get?
A cash-out refinance is an extremely smart and sneaky way of getting huge loan capital from your house. To basically summarise, 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$. 2.0 million and over the course of the 15 years, you have managed to bring down your home loan to S$ 250,000.
Now, let’s say you have been given an opportunity 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 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 with 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 Millon
The amount in hand is likely more than any what you could normally borrow. A cash-out refinancing definitely benefits more for owners of private property 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.
Alternative to Cash-Out Refinancing
As you may know, cash-out refinancing for your home loan may not be for everyone, and is good to look into other alternatives that could be more suitable for you.
Home Equity Loan
House equity vs. a standard term loan is when the house equity assists you to tap into the current value of the property which has been fully settled. Using this can help you pay off your credit card debt much sooner. Therefore, if your current property has increased in value through time, a house equity mortgage may be the best option to borrow some money at a low-interest rate.
In Singapore, private property owners are the only ones eligible to take equity for a home loan. So, if your only property is an HDB flat, you will not be eligible for refinancing cash-out.
For those who are owners of Executive Condominium, you have to wait until your 5-year Minimum Occupancy period runs out before you can consider refinancing a cash-out.
To add further, if you still have an outstanding home loan, you can only get the house equity loan from the same bank you have taken the home loan from.
For example, if you have a home loan from bank A right now, you can only get a home equity loan from bank A.
Another thing you need to know about home equity loan is that it depends on three important factors:
- 70%-80% of your property’s current market value is taken into account
- Your outstanding home loan amount (if any)
- The total amount of CPF funds used to purchase your property
That is why it is important for you to understand the criteria when looking into a home equity loan.
Home Equity Line of Credit (HELOC)
A home equity credit line, HELOC in short, is a property-secured credit line. Since it is a secured credit facility, it has a lower interest rate relative to traditional lines of credit.
The limit set on the account will depend on the request of the applicant and will be subject to LTV.
To provide us with a better understanding, if a property is worth S$800,000 with a S$300,000 loan balance. At an LTV of let’s say 50%, the maximum mortgage will amount to S$400,000. Thereafter, taking into account the deduction of the mortgage balance, we would be left with S$80,000. This would be the credit limit on the HELOC.
In other words, HELOC is basically taking an overdraft facility secured by your current home.
Since lender’s do not take advantage of interest rate until the borrower uses the service, they continue to charge an annual fee to hold the account. Compare this with a standard home equity mortgage where the lender pays an interest rate on funds immediately after disbursement of the mortgage.
Because of this predictable lack of use which causes a lack of interest charges, lenders compensate for it by charging a higher interest rate compared to regular mortgages.
Indeed, HELOC’s interest rates are at least twice that of regular home loan and some are ten times home loan.
The silver lining is that typically people who sign up for HELOCs are more careful about money and spending. Otherwise, then they’d gone for a lump sum term loan.
The credit line is generally used as a source of emergency funds should it be needed in the future. That’s also why many borrowers actually don’t use the facility and keep it as a source of peace of mind.
Steps to Refinance Your Home Loan
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 includes 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, 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. By 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
In conclusion, if you seek to refinance your home loan, there are benefits to it. The key is to understand which refinancing suits you if to do your due diligence and homework. Everyone’s needs are different due to the situation and needs at that time.
But through Loan Advisors, Your One-Stop Loan Comparison Portal, we hope to make your experience a little simpler by providing you assistance through the best deals, comparison data, and home loan packages. Furthermore, it’s a free service! Do visit our website to learn more about home loans, best banks in Singapore, lenders, and other financial institutions that offer home loan packages.