If you’ve just purchased your first home, congratulations! Not only do you now have a new place of your own, but you also have a 25-30 year loan on your hands that’ll take up the lion’s share of your budget.
Thankfully, there’s a way for you to lower your monthly repayments and raise the capital gains if you intend to sell your home in the future – through refinancing. You’re still a few years away from refinancing (every 3 years), but it doesn’t hurt to learn about it today.
What is Refinancing?
When you refinance, you’re choosing to end your existing loan package with your current bank by continuing your repayments with another bank that offers a better loan package.
Let’s say you have a 1.95% SIBOR package from your existing bank. But another bank offers a 1.35% SIBOR package. By refinancing your loan with the bank offering a better loan package, you’ll be able to make lower monthly repayments.
Remember, there’s no such thing as a “loyalty” discount for staying with your current bank. If another bank offers a better loan package, it’s in your best interest to refinance to save money.
How Does Refinancing Compare to Repricing?
The two words sound alike, but they mean something completely different. The biggest difference between the two is that repricing is when you switch from one loan package to another within the same bank.
Let’s say you have a 1.95% SIBOR package from your bank, and after a few years it offers a new 1.65 SIBOR package. If you switched packages, you would be repricing because you switched loan packages within the same bank.
You should also not that some banks offer “free” repricing, allowing you to switch packages without incurring any “administration fee,” which is typically around $500.
How Much Does Refinancing Cost?
Refinancing isn’t without its costs. MAS made sure of that by requiring all banks to stop paying subsidies on fire insurance, legal fees, and valuation. That means you’ll have to pay those fees directly to the bank whenever you want to refinance, and that can mean $2,000 – $3,000. Thankfully, you can use you CPF to pay these fees.
In addition, some banks have a lock-in clause that lasts from 2 – 5 years. If you refinance during this period, you’ll have to up about 1.5% of your outstanding loan amount in addition to the fees for refinancing with another bank! So it’s best to wait until the lock-in period ends to refinance.
Important Note: If you purchased your home before October 2012, you may remember that the bank paid certain subsidies on your home loan including legal costs, valuation, and fire insurance.
If you refinance within 3 years of your loan approval, your bank will exercise its right to “clawback” the subsidies it paid on your home loan – meaning you’ll have to pay it all back.
So it’s best to wait until the period is over, otherwise you’ll be paying the cost to refinance AND the “clawback” fee, which can total $4,000 – $6,000!
When Should You Refinance?
Depending on your situation, you’ll need to wait until either the “clawback” or lock-in period on your home loan has ended to refinance. But what about when that period passes and it’s safe to refinance without any extra fees?
You’ll know it’s the right time to refinance when:
- A better package is offered: Home loan packages change from month to month. Even if you managed to land a good home loan deal, it won’t stay a good deal forever. So once you can refinance (usually after 3 years), make sure you search for a loan package that’s at least 0.5% less than your current rate. Remember, the lower your interest, the lower your repayments.
- You need to change you loan’s tenure: If you’re a borrower who’s not worried about the overall cost of your loan, but the cost of making monthly repayments, refinancing can help. So if your loan’s tenure is 25 years, you can refinance it to 30 years, which will decrease your monthly repayments, but increase your overall cost.
- Your savings meets or exceeds your cost within a year: Before you refinance, make sure you calculate whether your savings is more than the cost within a year. For example, let’s say your legal fees for refinance are $3,000 and your refinancing saves you $200 a month. Divide the cost by the savings ($3,000 / $200) to see how many months you need to pay before you “break even.” In this case it’s 15 months, so it’s a good idea to find a better deal.