Is refinancing your home loan now a good idea?

A Singaporean couple in their BTO flat looking at refinancing packages offered in this low-interest-rate environment

Is refinancing your home loan now a good idea?

No matter the interest rate that you’re currently paying for your home loan, there’s no denying that current market interest rates are looking very low and very attractive. Well, with the option to refinance your home loan, you don’t have to feel like you’re missing out on massive savings. Refinancing your home loan can give you plenty of benefits.

With that said, refinancing your HDB loan or bank loan has more to do than just interest rates. 

Refinancing means that you’re looking to take up a replacement loan with another bank to continue paying off your mortgage. 

On the flip end, repricing means you’re working with the same bank to ask them for their best quote for you.

Read more about refinancing vs repricing here.

When you refinance your home loan, here are the considerations to keep in mind, so you’ll know whether it’s a good idea for you.

Is it the right time for you to refinance your home loan?

Best time for Fixed Deposit Home Loan Rates 

If you’ve been considering refinancing your home loan, now may be the best possible time to do so as Fixed Deposit Home Loan Rates (FHR) are at an all-time low. 

With a capped at 1.4%, cashing in on FHR can guarantee minimal amount of payment in the years to come. Why? Because it’ll be to see FHR capped at 1.4% again if the market picks up.
Learn more about why now is the best time for FHR here.

Consider your lock-in period

Looking beyond interest rates, there are some time factors you may want to consider when you refinance your housing loan. For starters, you’ll want to make sure that you’re out of your loan lock-in period.

A lock-in period is a time in your bank loan where you’re entitled to special promotional rates. In the case of fixed-rate home loans, the end of a lock-in period might mean that you’re now subject to floating interest rates.

But more importantly, lock-in periods are a period which you need to stay with the current bank for the loan. So if you try to refinance your home loan before your lock-in period is over, you’ll wind up having to pay the penalty.

Typically, the penalty is usually about 1.5% of your outstanding home loan amount. So, say you’ve got S$300,000 left to repay on your home loan. That’s S$4,500 you’ll have to pay in penalties to hop to another loan package.

Starting your refinancing process

Despite that, you can still begin your refinancing process before your loan’s lock-in period has ended. You have up to 6 months to draw down the loan. So if you want to jump on an unbeatable interest rate and your lock-in period is ending soon, you should begin to refinance your housing loan early.

Keep in mind that you’ll also need to give your bank a heads up with a 2-month notice period if you’re refinancing your loan. In general, if you’re in no hurry, it’s good to begin refinancing your loan about 3 months before your lock-in period ends.

P.S. This doesn’t apply to you if you’re one of those lucky people who got your current home loan package without a lock-in period! This might have happened if you took your package during a time where banks were in the midst of pricing wars.

Read: 5 questions to ask before making a home loan refinance decision.

A Singaporean couple calculating the cost of refinancing their home loan in the current low-interest-rate environment

What’s the real cost if you refinance your home loan?

The cost of refinancing might vary for you, depending on whether you’re refinancing for an HDB property or private property. 

While refinancing can save you money in the long run, it’s also worth looking at how much of a cost you’ll need to incur to refinance your loan.

When you refinance your loan, you’ll incur legal and valuation fees. Depending on the type of property you have, this could cost you anywhere between S$2,000 to S$3,000.

If your outstanding loan amount is large enough, some banks may offer you subsidies or rebates to defray your costs., especially if the outstanding amount is larger than S$500,000.

While having legal costs defrayed might sound tempting, you should also make sure to stay on top of the small print. For example, these arrangements might stipulate certain durations known as a clawback period.

This means that if you break the lock-in period of your new home loan package, the bank may claw back the benefits they offered to you back. In this case, you’ll have to pay back the subsidies / rebates given on top of the penalty fees if you refinance your loan before the lock-in period is over.

However, much of these worries can be avoided if you want to consider repricing your loan and stick to the same bank that is currently offering you your home loan package. Besides, your current bank may offer you other packages for you to switch to. There are times when the rates may not be as good as what other banks have to offer.

If you reprice your loan, there will be admin fees involved.

Need help finding out the exact costs of refinancing your home loan package? A mortgage broker in Singapore might be able to help out.

Now is a good time to look at your home loan

Refinance to a better home loan package

As shared earlier, now is the best time for Fixed Deposit Home Loan Rates (FHR), as packages are going as low as 1.0% for the 1st year and 1.1% in the 2nd year, and Capped at 1.4% p.a. And in the event where FHR does go up, you will enjoy the safety net of a low rate capped at 1.4% for the first 2 years.

Refinancing your home to a more manageable home loan package can help pull your finances back within your control. 

Adjusting your home loan tenure

Other than interest rates, you could also increase or decrease your loan tenure, depending on your financing goals. These could have various advantages, based on whether you can play your cards right according to your financial situation.

If you shorten your loan tenure, you could clear off your loan faster. With the market’s current low-interest rates, clearing your loan off faster could mean saving on interest rates in the long run. 

This is especially beneficial if you’ve got a larger cash flow and you can afford to pay more in monthly repayments every month when you refinance your home loan.

If you lengthen your loan tenure, you might be able to lighten the load on your wallet by lowering your monthly repayments. However, as much as this might help you with repayments on a month-by-month basis, it might lead to an increase in overall monthly payments over the extended time.

A Singaporean couple looking at their monthly expenses to help with their home loan refinancing decision

Borrowing within what you can afford

Another thing you’ll want to stay on top of is that you’re borrowing within what you can afford. 

One way to ensure this is by using the Total Debt Servicing Ratio (TDSR) for private properties and Mortgage Servicing Ratio (MSR) for HDB.

If you want to start crunching some numbers on your own, you could start with the TDSR. 

TDSR dictates that your total monthly debt shouldn’t exceed 60% of your monthly income. Car loans, study loans, and credit card bills all count as part of your debt. So this doesn’t mean that your home loan amount can reach 60% of your monthly income.

So, say you and your partner’s combined monthly income is S$8,000, and you have a 20-year home loan outstanding. Here’s how you can calculate whether you can afford to repay your home loan monthly.

Ways to check if you can afford your home loan in SingaporeThe maximum you should spend repaying
Total Debt Servicing Ratio (TDSR)ALL monthly debt: 60% of $8,000= $4,800

If you’ve got no other monthly debt, going by the TDSR, you might be able to afford paying more than S$3,000 for your home loan every month.

With that said, you should consider that you might have more significant expenses over the next few years that will see you making monthly loan repayments. 
Learn more about what happens if you fail TDSR here. 

Consider refinancing your home loan in Singapore

Before you decide whether you want to refinance your home loan now, make sure you’ve covered all fronts financially. This includes any of the fine print that might come with your new home loan package!

Best of all, your key task is to make sure that refinancing your loan is indeed the best financial decision for you right now and in the years to come. A mortgage broker in Singapore can help you out with understanding all the nuances involved.

As homeowners ourselves, FinanceGuru makes it a priority to help you make the best home loan refinancing decision. We’re well aware of the whirlwind of details involved when it comes to home loans, and we’d love to hold your hand and share our own experiences so you can make a decision that works well for you.

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