Should you refinance your mortgage?
With rising interest rates, it might not be the most intuitive to refinance your mortgage. 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 might 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. 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 55% 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.
Start Planning Now
Check out DBS MyHome to work out the sums and find a home that meets your budget and preferences. The best part – it cuts out the guesswork.
Alternatively, prepare yourself with an In-Principle Approval (IPA), so you have certainty on how much you could borrow for your home, allowing you to know your budget accurately.
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