If you’ve ever Google searched, "What does home loan refinancing mean", "refinance home loan", or "how does refinancing a house work", you’ve come to the right place.
With interest rates set to gradually rise in 2022 and beyond, MAS advised Singapore households in its Financial Stability Review on rising mortgage debt in December 2021. Aside from exercising financial prudence, households can consider saving on their mortgages by refinancing them.
In this guide, we’ll provide a breakdown of what refinancing your home loan in Singapore means. We’ll cover:
- What does home loan refinancing mean?
- How does refinancing a house work?
- Do you need to pay to refinance?
- Is it good or bad to refinance your home loan?
- How to refinance your home loan
What Does Home Loan Refinancing in Singapore Mean?
Simply put, home loan refinancing is the process of replacing an existing property loan with a new one from a different bank. This is usually done when the new housing loan offers more favourable terms. For example, you may refinance your HDB housing loan (e.g. 2.6%) to a bank loan that offers a lower interest rate (e.g. 1.5%) or take advantage of a competitive interest rate.
You may also choose to move from one bank to another bank once your lock-in period is over and your existing plan’s interest rate goes up.
Refinance Housing Loans: How Does Refinancing Work?
How home loan refinancing 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.
Refinance Housing Loans: An Example of How Refinancing a Housing Loan Works
Say, in 2017 you took a property loan with Bank A at 1.8% (3-year fixed rate). Now that the three years are over, the interest rates have gone up to over 2%. At this point, you still owe Bank A $300,000.
Thinking that this is too expensive to service the rest of your debt, you decide to shop around and find that Bank B is offering interest rates of 1.5% (3-year fixed rate). Hence, you decide to apply to refinance to Bank B.
If your refinancing application is approved, Bank B will pay Bank A the $300,000 that you owe. You will no longer owe Bank A any money; instead, you will owe Bank B $300,000 under the terms of the new loan. The loan is essentially ‘transferred’ to Bank B.
Do You Need to Pay to Refinance Your Housing Loan?
Yes, there are certain costs involved with refinancing your house loan. The two main fees are 1) legal fees and 2) valuation fees. Added up, these can cost from $2,000 to $3,000+. However, many times, banks will offer to subsidize these costs to incentivise homeowners to refinance.
For example, if you’re refinancing home loans in Singapore from Bank A to Bank B, Bank B may offer you a $2,000 subsidy to help lower the costs. Subsidies often come with a clawback clause though, which stipulates that you can’t refinance again for a few years (unless you pay back the subsidy).
Depending on the terms of your existing home loan, there may also be other costs like prepayment penalties and/or cancellation fees. To be sure, it is best to check with your current bank whether these charges will apply should you decide to refinance.
Given the costs involved, should you still consider refinancing home loans?
Is it Good or Bad to Refinance Your Home Loan?
This is a tricky question as it largely depends on your unique situation, but generally, you can calculate your potential savings to help you decide if you should refinance. Factor in both your costs of refinancing and how much you can expect to save in monthly repayments.
As illustrated above, there are many instances when refinancing your house loan can result in significant savings. Generally, those with HDB loans consider refinancing after a few years when they’ve paid off at least 25% of their property’s price (because most people can only borrow up to 75% from banks).
Those with bank loans typically explore refinancing once their lock-in periods are over (so they can switch to another bank without having to pay any penalties).
Pros and Cons of Refinancing Home Loans in Singapore
| Pros of refinancing your home loan | Cons of refinancing your home loan |
| Lower monthly repayment rates | High transaction fee |
| Ability to change loan type | High interest cost |
| Freedom to change the loan term | More loss than profit if not calculated properly |
| Ability to meet your financial needs using your existing home equity |
How to Refinance Your Home Loan
The process of home loan refinancing sounds complicated, but it’s actually a very straightforward process. Here are the steps to refinancing:
- Check that it is a good time for you to refinance your home loan in Singapore (i.e. your lock-in period is almost over)
- Compare interest rates across major banks in Singapore
- Decide on your preferred home loan.
- Prepare the necessary documents (see our refinancing checklist here) and submit your refinancing application
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