We’ve all had instances where we change our minds, especially if a better deal comes our way or if our circumstances change. When it comes to property loans, it is no different. Your existing home loan or mortgage may have been the most suitable choice for you when you first bought your property, but now that it’s been some time, you may feel the itch to explore another mortgage package.
If you have a bank loan that you took up three to five ago, chances are that you’re past your initial lock-in period and promotion-rate period, meaning you’re also likely to be paying more than current mortgage rates in the market.
Currently, we are in a high interest rate environment. Interest rate hikes are likely to only moderate in the second half of 2023. And it’s likely those who are financing their property with a floating rate bank loan are feeling the pinch; their monthly mortgage payments have probably increased quite a bit over the past year.
Alternatively, you may have taken up additional debt obligations since your home purchase. Maybe you’ve bought a new car, or have started a family. Regardless, you now need to readjust the loan terms to make servicing your mortgage more manageable.
Refinancing Your Home Loan: What Are Your Options?
One solution to the above is refinancing your existing housing loan. Essentially, when you refinance, you are replacing your existing property loan with a new one that offers more favourable interest rates and/or loan terms.
To examine some benefits of refinancing, we’ve spoken to PropertyGuru Finance Mortgage Experts, Apple Tan, Ben Goh, and Ethan Ng for some input.
Before we explore the benefits of refinancing your mortgage, let’s first take a look at the types of refinancing available.
Home Loan Refinancing: Switching to A New Lender
Home loan refinancing is the most common type of loan refinancing. As the name implies, it entails switching from your existing property loan to a new loan from another bank or financial institution, usually with more favourable terms.
For example, let’s assume you took up a housing loan from Bank A with a 3-year fixed interest rate of 1.2%, back in 2020. At the end of the 3-year mark, you are no longer within the lock-in period and interest rates on your loan have increased to 3.5%. You now owe Bank A a remaining loan amount of $400,000. You then discover that Bank B offers a lower 3-year fixed rate of 3.2%. You decide to refinance with Bank B, which means that Bank B will then pay Bank A the remaining loan amount. You’ll now owe Bank B $400,000 under the terms of the new loan.
Do note, however, that refinancing comes at a cost. Two key costs that you should be aware of are legal fees and valuation fees, which typically range from $1,650 to $2,250, or more. There may also be prepayment penalties or cancellation fees.
Apple Tan, Team Lead, Mortgages, PropertyGuru Finance, points out that home loan refinancing often comes with a one- to three-year clawback period during which you cannot redeem your loan or apply to refinance again.
That said, quite often, banks extend refinancing promotions in the form of subsidies or rebates to help reimburse these costs to new clients. If you’re thinking of refinancing and are concerned about the fees payable, go ahead and check with a Mortgage Expert. They’ll help inquire if the bank you’re intending to refinance your home loan with offers any running promotions.
Cash-Out Refinancing: Also Known As Home Equity Loans
Alternatively, you could also take up a home equity loan. In this case, you use your property as collateral to access a larger loan amount and give you interest rates that are more attractive compared to other unsecured housing loans.
Ben Goh, Team Lead, Mortgages, PropertyGuru Finance, shares that the loan amount is subjected to various factors such as “the current market value of your property, your outstanding loan amount as well as how much CPF you’ve used for your property purchase”.
When taking up a home equity loan, you’ll need to maintain a Loan-to-Value (LTV) ratio of 25%. This means that the maximum you can ‘cash out’ from a home equity loan is equivalent to 75% of your property value.
Do note that you cannot use your HDB flat as collateral. Home equity loans only apply to private properties. On top of the monthly repayments, you’ll have to make, you’ll also have to keep in mind costs such as legal and administrative fees which range from $3,000 to $4,000.
4 Benefits of Refinancing Your Housing Loan
Now armed with a better understanding of types of refinancing, let’s take a look at some benefits.
1. Lower Monthly Repayments
By refinancing your home loan, you can lower your monthly repayment amount. You can achieve this by securing a more attractive interest rate, and/or by lengthening your home loan tenure (although the latter will incur higher overall interest costs).
You can also consider refinancing your home loan from a SIBOR-pegged loan to a more competitive SORA-pegged package. SIBOR and SORA are benchmark interest rates. They are used to determine the floating interest rates for bank loans.
Here’s an example of how much you can potentially save when switching from a SIBOR-pegged to a SORA-pegged home loan. Let’s say you have an outstanding loan of $550,000, and 20 years left in your tenure, and you make the switch:
* Both the 3M SIBOR and 3M Compounded SORA values were taken from 16 February 2023.
^ At the time of writing (23 February 2023), a spread of 0.55% was used for the illustration of SORA loans as it is the most competitive package on PropertyGuru Finance. You may compare the latest mortgage rates on PropertyGuru Finance.
By refinancing to a SORA home loan and not adjusting your loan tenure, you can save $284 per month!
Some might argue that cost savings from refinancing aren’t significant enough. However, as mentioned, depending on your loan package, there are usually subsidies and promotions available to help you cover legal and valuation fees. Over a long period, these amounts add up!
2. Ability to Adjust Loan Tenure to Suit Financial Needs
As mentioned, refinancing your home loan also allows you to adjust the tenure of your housing loan to better suit your financial needs. By extending your tenure (i.e. the length of your loan), you can ease cash flow and make your monthly repayments more manageable.
However, this move does increase your overall interest costs because you’re agreeing to repay your loan for a longer period. Do consider carefully and think about what you’re freeing up this cash for.
For example, if you suffered a loss in income and are struggling to make your monthly mortgage repayments, refinancing with a longer tenure can be helpful. However, if you’re just extending your tenure to lower repayments so you have spare cash for frivolous purchases and expenses, then it may not be advisable.
On the flip side, you may be looking to repay your housing loan in a shorter amount of time so that you’ll have peace of mind and be able to use your cash on hand to meet other financial purposes. One way to do this is to refinance your existing home loan with a higher monthly instalment and shorter loan tenure.
3. Debt Consolidation
Additionally, if you are someone who has previously incurred high-interest debts (e.g. through personal loans), you may opt to refinance to a debt consolidation loan. This allows you to consolidate all your existing loans under one loan, which will make it easier to manage your monthly debt obligations.
Interest rates on debt consolidation loans are generally much lower compared to other loans such as credit card loans and personal loans. Credit card loans have interest rates which could go as high as 24% per annum while home equity loans typically have interest rates which are as low as 1% per annum.
However, that said, Ethan Ng, Team Lead, Mortgages, PropertyGuru Finance, emphasised that your eligibility to take up a debt consolidation loan would depend on “whether or not you have adequate debt allowances and a good credit profile”.
4. Ability to Use Your Existing Home Equity to Meet Your Financial Needs
Finally, through cash-out refinancing, you can utilise your existing home equity to meet your existing financial requirements. When you take a home equity loan, you can ‘withdraw’ the funds at your own discretion rather than cashing out all at once. These funds can be used for various purposes such as meeting your debt obligations, investing in the stock market, or using it to start a business, etc.
The approval of your home equity loan application is subject to the individual bank’s discretion. According to Apple, “the turnover time for approval of such loans is about a week, after which you can withdraw the funds at any time once the loan has been disbursed to your account”.
Should You Consider Refinancing Your Home Loan in 2023?
At the end of the day, if you find yourself stuck with too high of a housing loan interest rate, do not fret! In this article, we’ve shown that refinancing can be a very useful tool when it comes to planning and managing your finances.
Still unsure of whether to refinance your home loan or which refinancing plan suits you best? Connect with one of our PropertyGuru Finance Mortgage Experts today.Chat with us on Whatsapp Fill up an online form
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