Refinancing is a key consideration for many home loan borrowers since Singapore Interbank Offer Rate (SIBOR) and Singapore Swap Offer Rate (SOR) - both industry benchmark interest rates that are used to price home loans in Singapore - fluctuate and may, to a huge extent, affect the borrower's monthly interest payments on the loan.
Rising interest rates would mean that mortgage borrowers would have to fork out higher monthly repayments, and the reverse is true when interest rates fall. To mitigate this, some borrowers could look into refinancing their loans, especially if the loan is close to the end of its lock-in period, typically between 1 to 3 years.
Most borrowers refinance their loans in the hope of getting a better home loan package compared to their existing loan. However, there are a number of issues that one has to consider before refinancing in order not to end up paying even more to service your home loan. Here, we at GET.com have listed 3 things that home loan borrowers should consider before refinancing their home loan.
1. Refinancing vs Repricing
For those unfamiliar with the terms, refinancing essentially means replacing your current bank's home loan package with a new one from a different bank. This usually allows you to save some money by making lower monthly repayments due to a more competitive package.
Repricing is a similar concept, except that you stay with your existing bank but take up a different home loan package. The advantage is that you can avoid all the administrative paperwork that needs to be done if you refinance with a different bank. There could be fewer fees incurred as well, as some banks offer free repricing, i.e. waiver of administrative fees for repricing your home loan within the same bank.
Refinancing is a pretty common financial move by borrowers especially after the existing home loan's lock-in period.
Most fixed-rate home loans have a 2 to 3-year timeframe in which early redemption of the loan can result in a refund or ‘clawback' of subsidies you have enjoyed.
This can amount to about 1.5% of the redeemed amount. Borrowers also need to take into account other fees associated with refinancing such as legal fees and valuation fees.
Bottom line, if the total savings amount to more than the interest savings, then it might make sense for you to refinance even within the lock-in period.
And in case you are big on flexibility, perhaps you could even consider home loans without a lock-in period.
2. TDSR Framework
In previous years, the key concerns with refinancing usually centred on the different fees that banks levy on borrowers.
In recent years, there has also been a concern on the borrower's eligibility. This is largely due largely to the Total Debt Servicing Ratio (TDSR) regulation introduced in June 2013, as part of the suite of property cooling measures put in place by the government, which makes refinancing more difficult.
According to the TSDR requirements, a borrower can only borrow up to 60% of his gross monthly income. The 60% borrowing cap not only includes your housing loan, but also all other outstanding debts - such as car loans, personal loans and credit card debts.
Imagine a loan borrower who was able to pass the TDSR when he took on financing at the end of 2013. In the last three years, he might have taken up a car loan, or decided to guarantee the education loan of his child.
This would mean that he will be subjected to the TDSR requirements again should he want to refinance. In short, he might not pass the 60% TDSR requirement.
As of 1 September 2016, the Monetary Authority of Singapore has made some changes to the TDSR for borrowers who are refinancing.
If you're a homeowner who is refinancing your property loan, you may be excused from the TDSR requirement if you meet certain criteria. This just means that you'll get to enjoy more flexibility and take advantage of lower interest rates that you previously couldn't because of the TDSR threshold of 60%.
To learn more about how you can cut your home loan debt, read about these 3 things you need to know about the TDSR changes.
To learn more about home loan terms, check out these 10 essential home loan terms that every borrower should know.
3. Go For The Long-Haul
Many borrowers are tempted by the initial low interest rates offered by banks during the first few years of the loan tenor, keeping in mind that they can always refinance after the lock-in period.
Bank spreads might go up during this period, adding on to the total interest rates you pay even if benchmark rates are down.
It might thus be wiser to consider a good long term loan, that you can continue to afford to service the loan based on the interest rates payable from 'Year 4 and thereafter'.
In GET.com's home loan guide you can find more information about refinancing your home loan.