Should you refinance your mortgage?
With interest rates at such lows, it’s certainly tempting to refinance (or reprice) your home loan. Think of the interest savings that you could achieve! Or perhaps, you might be drawn to the interest rates and benefits of another loan package.
But interest rates aren’t the only thing that you should consider. Part of the reason is that when you refinance a mortgage, you’re effectively taking up a replacement loan with another bank to pay off your existing loan. If you ask your current bank for their best quote for you, that is called “repricing your home loan”.
Here are the 3 other reasons to ask yourself if you’re thinking about refinancing your mortgage: timing, related costs, and your financial situation.
Check: Two most important “timings”
You may have heard from friends and family that refinancing your mortgage can save you money. Given the large amounts typically involved, a slight decrease in interest rates can result in significant savings.
However, before you send off the application, check your:
- Home loan “age”. Check if your home loan is at least in its 4th year, as that is when most bank loan packages raise their interest rates.
- Lock-in period. If your existing mortgage is still within the lock-in period. If it is, then it is not advisable to refinance. The penalties involved are almost never worth it.
Check: Potential savings more than related fees
The related costs are slightly different, depending on whether you are refinancing from a HDB loan, or another bank.
- Early redemption penalties and fees. If you took a loan from HDB, then there is no early redemption penalties and fees. If you took a loan from a bank, the fees vary from bank to bank, so it’s vital to check if the potential interest savings are higher than the costs involved in switching over.
- Legal and valuation fees. Don’t forget to add in possible costs from your new mortgage as well, such as legal fees charged by the bank. Some banks offer cash rebates to offset the legal and valuation fees involved in refinancing.
Other than refinancing with a new institution, you can also consider repricing your mortgage with your existing lender. Many banks have reduced their home loan interest rates, and your current bank could also be offering new and more attractive loan packages that you could switch to.
The main benefit with repricing is that you stick to the same bank, which tends to be quicker, involve less paperwork, and avoid incurring some fees (such as legal fees).
Check: Changes to your financial situation
You might want to consider refinancing when your financial situation has changed, and you are looking to increase or decrease your loan tenure (based on the maximum tenure allowed).
- Shortening your loan tenure allows you to clear off your loan faster, say with lower interest rates and similar monthly instalments.
- Lengthening it lets you lower the monthly repayment, thus easing your cash-flow. One thing to note is that lengthening the loan tenure may lead to an increase in the overall amount that you pay.
You’ll also want to check that you are borrowing within your means, as measured by the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR). This is particularly important if your monthly take-home pay has changed, or you have variable income.
- TDSR: Your monthly debt cannot exceed 60% of your monthly income. The calculation includes all types of debt: home loan repayments, credit card bills, student loans, car loans, personal loans, etc.
- MSR: Your monthly home loan repayments cannot exceed 30% of your monthly income.
Finally, be sure to read the fine print of any mortgage package you are considering. Calculate and compare the loan packages, inclusive of any processing fees, to ensure that the switch to refinance or reprice makes the best financial sense for you.
Here’s an idea of how much refinancing from a HDB Concessionary Loan to a DBS/POSB bank loan may save you.
Let’s look at the sums for a refinancing loan amount of S$300,000.
- With the Super Rewards Package: You pay 2.60% p.a. for the first year and 1.8% p.a. for the 2nd to 5th years. Switching over from a HDB Concessionary loan gives you 0.8% interest savings, which works out to S$110 a month, and S$5,280 for those four years.
For cash rewards, since the loan amount in this example falls in the first qualifying tier of S$200,000-S$400,000, you will get an upfront cash reward of S$5,000. Note: The amount of cash reward increases as your refinancing loan amount increases.
- With the Super Savers Package: You pay a fixed rate of 1.5% p.a. for 5 years. Switching over saves you interest of 1.1% each year (vs 2.6% p.a. from HDB). That translates to cost savings of S$156 each month, and adds up to S$9,404 after five years.
For cash rebates, since the loan amount in this example is above the minimum S$250,000 amount, you will get cash rebates of S$2,000 that you can use to offset legal and valuation fees.