How to optimise your home loan refinance in a low-home interest rates environment

Married couple calculating their home loan interest rate in Singapore for refinancing plans

How to optimise your home loan refinance in a low-home interest rates environment

Repricing and refinancing are sometimes used interchangeably when one is thinking of switching to a cheaper housing loan. While this is more than acceptable in a conversation with friends over lunch, it does make a huge difference to the starting point of your evaluation journey as you decide whether to reprice or refinance.

For clarity, refinancing means switching your mortgage for another with a different bank altogether. Repricing, on the other hand, involves switching to a different loan package within the same bank. 

The current mortgage market

With Singapore banks interest rates at their lowest in recent years, 2020 has proved to be an excellent review opportunity to secure more favourable interest rates on home loans. 

HDB owners, in particular, who had previously used an HDB loan to buy a flat, can look forward to a desirable bank loan rate. Currently, the HDB loan rate is around 2.6% p.a, whereas bank rates are around 1.3% p.a.

Find out more on HDB loan vs bank loan here.

If you’re concerned, rest assured that you can still use your CPF to pay for the mortgage, even after switching to a bank loan. 

Read about why you should do a home loan health check here.

What are the key areas to consider before refinancing?

FinanceGuru who has been receiving more refinancing inquiries over the past few months, observes that homeowners who used to be paying over 2% interest rate, would now be enjoying substantial savings with the current rates now cut by almost half.  

“Regardless of your preference for fixed or variable packages, refinancing with the low home interest rates environment could yield substantial savings,” Jasper Eng, Head of Mortgage, FinanceGuru. 

Eng added that homeowners should look out for several key areas of consideration before deciding to refinance their housing loans.

1. Eligibility 

Check if your home loan is still within the lock-in period

Most home loan packages, especially those with a fixed-rate, feature a lock-in clause that typically spans from 2 to 4 years. 

If your loan is still within the lock-in period, it would not be worth refinancing right now as your current bank will charge a penalty fee.

2. Benefits

Pregnant wife and husband preparing salad in the kitchen, discussing their plans for upgrading their home through refinancing

Eligible homeowners who would benefit most from considering mortgage refinancing are:

  1. Those not under a lock-in clause     
  2. Investors who are looking to put the property on the market for sale soon
  3. Landlords who have a priority to keep repayments low
  4. Those considering reducing debt obligations 

Let us have a more detailed look at the amount of savings you can expect, in each of these 4 instances, based on:

Loan amount$500,000
Interest rate 1.5%
Repayment period20 years
  • Those not under a lock-in clause
    As shared earlier, if you’re still within the lock-in period of your housing loan, refinancing while under the clause will incur a penalty which is typically calculated as a percentage of the loan quantum. 

    For instance, if the penalty is 1.5% of your loan amount, your savings from refinancing would need to exceed your penalty cost of $7,500.
  • Investors who are looking to put the property on the market for sale soon
    If you’re contemplating a change in your financial goals, planning more space for the family, or looking to sell your house in the near term, you should explore a package with no penalty in the event you will to sell your property. 

    Your primary goal should feature paying the least amount of money interest to reap greater capital gains ultimately. 

    In this current low-interest rate environment, you’ll benefit from opting for a package with the lowest rates, regardless of whether you choose a fixed or a variable rate loan. 
  • Landlords who have a priority to keep repayments low
    Like homeowners looking to sell their property soon, the emphasis for landlords should be to minimise repayments to preserve rental gains. 

    The lesser repayment you pay upon refinancing, the more rental income you’ll receive after deducting your property’s monthly repayment. 
  • Those considering reducing debt obligations 
    If you’re facing any financial difficulties or looking to reduce outgoings, a good place to start is to reduce repayments on high-ticket items such as your home loans. 

    If you’re able to refinance your home loan for a lower interest rate of 1.50% compared to your previous rate of 3%, you’d be paying $2,413 a month after refinancing. 

    Compared to the previous monthly repayment of $2,773 a month, you’d be looking at savings of $360 per month and a cumulative savings of $21,451 (after reduction of monthly instalment and interest) over a period of 3 years.  

Consider getting a mortgage advisor for a more thorough calculation to determine the best option available to you. Our team of Mortgage Specialists at FinanceGuru can help you navigate the refinancing maze, recommend the best bank loan and handle the paperwork for ZERO fees. Make an appointment with the experts at FinanceGuru now.

3. Savings you can look forward to

Woman smiling and taking notes of her monthly savings yielded through her refinance plan

The small monthly savings may not seem like much but see how the cumulative savings from the 3 year period could come up to. 

If you expand this calculation for the full tenure of your home, the yearly savings of $7,150, based purely on an additive calculation, could come up to almost $214,500 by the end of a 30-year loan. 

Most would pose the cost of conveyancing fees and valuation fees charged by the banks as a deterrent to consider refinancing. However, if refinancing your home loan would lead to a decrease in monthly repayments to $300 a month, based on $2,000 conveyancing cost and a $500 valuation fee, then the time and money would be well spent. 

You can look forward to recoup these upfront costs of conveyancing and valuation fees in less than 6 months. These savings could well be amplified if the bank offers to subsidise your legal fees.  

Learn more about cash-out refinancing for your private property here. 

Here at FinanceGuru, we seek to help you better prepare for your finances and the upcoming milestones in your life. Learn more about optimising your home loan and uncover hassle-free ways that will save you time and money. Get a non-obligatory assessment and loan product recommendations today. 

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