As home loans typically involve a large sum of money, even a seemingly small change in your mortgage interest rates can lead to either significant savings or increased costs for homeowners.
Typically, home loans come with promotional interest rates in exchange for a lock-in period of 3 years. After this, interest rates tend to increase, subject to the bank’s board rate or the Singapore Overnight rate Average (SORA).
At this point, you must decide if you want to 1) accept the increased rates and pay more, or 2) switch to a cheaper home loan to save on your monthly mortgage repayments.
The latter sounds like the obvious choice, but is it really? Do you always save money when you refinance?
5 Things to consider when making home refinancing decisions
Before you make a beeline for the bank with the lowest advertised home loan rates, here are 5 common pitfalls and important things to consider before refinancing your home loan.
1. It may be unwise to refinance your mortgage during the lock-in period.
As mentioned earlier, most mortgages come with a 3-year lock-in period. If you decide to refinance your mortgage during this period, it is considered an early redemption of your home loan and you will be charged hefty penalties and fees.
This is in addition to any refinancing costs you may also need to bear and as such, is likely to negate any cost savings you may enjoy from a lower interest rate.
The early redemption fees can amount to 1.5% of your remaining home loan. For example, if you have a remaining home loan of $500,000, this adds up to $7,500 in early redemption fees.
2. Don’t just consider refinancing. Sometimes, repricing is more suitable.
Apart from going to another bank to refinance your home loan, you can also choose to reprice your home loan with your existing bank. Repricing is basically switching to a cheaper home loan package, but within the same bank. For more information, check out this article on the key differences between repricing and refinancing.
Generally, the interest rates offered by repricing are typically higher than if you had refinanced. However, some homeowners may prefer repricing as it avoids a lot of the hassle involved in refinancing with another bank.
You should check with your bank or mortgage broker to see what they can offer; like complimentary repricing terms and shorter waiting periods so you can enjoy the lowered rates as soon as possible.
Of course, you can also negotiate for additional perks when you refinance with a new bank, especially if your home loan amount is substantial (above $300,000).
If you are unsure of the next steps to take when your lock-in period is coming to an end, you can leverage on the expertise of the team at PropertyGuru Finance to uncover the most suitable option for you, be it to refinance or reprice your current home loan.
Do note that regardless of whether you refinance or reprice your home loan, you will need to fork out legal and administrative fees. This can amount to $1,000 when you reprice, and between $3,000 to $4,000 when you refinance.
3. Start shopping for mortgage rates early, don’t wait until the last moment.
Although you should wait until after your lock-in period to refinance and avoid the 1.5% penalty fees, it doesn’t hurt to start shopping around early.
That’s because the entire refinancing process can take a while: You’ll have to find a suitable home loan package, apply for the new home loan, wait about three months for it to be processed and then serve out the remaining period with your existing bank.
If you are unable to secure a refinancing package immediately after your lock-in period is up, you may find yourself stuck paying higher interest rates for several extra months.
4. With home refinancing, be prepared to pay thousands upfront before saving in the long run.
Unfortunately, refinancing isn’t as simple as just hunting for a better interest rate. To save in the long-term, you must first be prepared to fork out several thousand dollars for legal and administrative costs, as well as valuation fees when you refinance your home loan.
Your savings will then come in the form of reduced monthly repayments, which should amount to more than what you paid upfront. As you may consider refinancing again after your new lock-in period ends, you should do your calculations based on the savings earned during the new three-year time frame.
Picking a suitable package can be tricky. Sometimes, you may spend weeks scouring bank websites and shortlisting packages, only to realise that you don’t save all that much from a particular package you were eyeing.
To save precious time and effort, let PropertyGuru Finance do the heavy lifting for you. We will compile the best rates in the market and guide you through the process, ensuring a seamless transition into a better home loan package.Chat with us on Whatsapp Fill up an online form
Disclaimer: The information is provided for general information only. PropertyGuru Pte Ltd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.