Tips To Refinancing Home Loans In Singapore

~ Posted on Tuesday, February 7, 2017 at 6:58 AM ~

Almost everyone in Singapore will need a mortgage loan to purchase a house. If you choose to buy a private property, you can only get a bank loan but if you buy a Housing and Development Board (HDB) property, you can choose between a HDB loan and bank loan.

Bank loans are structured in such a way that if you fail to refinance regularly, you will miss lots of cost savings and end up spending much more on your housing loan installment but most banks will not reveal this to you. Refinancing your home loan is a great way to refresh your finances to better suit your current lifestyle.

How bank loans work

 Each bank loan package has a spread applied to the interest rate. For example, if it is a SIBOR package, it will have something like sibor+0.8%. After several years, often 2-3 years, the spread increases to even 1.2 percent which is a significant amount on your regular loan installment. Unfortunately, most people do not realize that the rate they are paying currently is just temporary and any increase will make them pay additional hundreds or even thousands more dollars per month.

Advantages of refinancing

The major advantage of refinancing regardless of home equity is lowering the interest rate. Often, as people make advancement in their careers and continues to earn more money, they are able to pay their bills on time which in turn increases their credit score. The increased credit score comes with the ability to obtain loans at relatively low interest rates. A lower interest rate on home loan can have a significant effect on your monthly payments potentially helping you save hundreds of dollars every year.

Ignorance is the major risk of refinancing. Though refinancing can help you to make massive savings, without the basic knowledge, it can actually hurt you by increasing your interest rates instead of lowering them. Below are some tips on refinancing home loans in Singapore that will help you get the best deal at the most affordable price.

The best time to refinance

You should not wait until you notice an increase in your loan installment which happens after an increase in net interest rate spread to refinance. You can refinance even six months before the expiry of your lock in. This is because the minimum notice period for refinancing is three months which means if you wait until the lock in expires, you will be stuck with a high interest rate and increased monthly instalments for at least three months which will cost you thousands of dollars.

In most cases, it is best to refinance with the original lender though it is not a requirement. But for a bank, it is easier to keep a customer than acquire a new want, therefore, they will be willing to offer a better price for borrowers looking to refinance. So, you have a better chance of obtaining a better rate with your original lender.

The different variable rates to choose from

Home loan packages have both variable and fixed rates. The variable rates have different options to choose from which can be quite confusing. The three main types of variable rates include:
· Sibor/ SOR rate
· Bank’s board rate
· Fixed deposit mortgage rate

As mentioned above, home loans have a net interest rate spread. For the variable rates, it is attached to each of the above types. Therefore, it can either be sibor +0.8%, board rate+0.8% or fixed deposit mortgage rate+o.8%.

SIBOR and SOR rates are determined by the Association of Banks in Singapore and are published on financial mediums such as Bloomberg, Reuters and The Business Times. All banks follow the same sibor/sor rate but every financial crisis causes the rate to fluctuate quite badly. For example in 1987, sibor/sor rate was at 8 per cent, in 1998, it reduced to 7 per cent and further reduced to 4 per cent in 2007.

Of all the three types of variable rates, the Bank board is the most not transparent. The bank can change it anytime it pleases then inform you abruptly on the increase in the monthly instalments. There is no way to confirm this rate.

The fixed deposit mortgage rate is relatively new compared to sibor/sor rate or the bank board rate. Most people maybe led to think that this is fixed rate but it not. However, it is less volatile compared to sibor and bank board rate.

Fixed deposit mortgage rate is attached to the fixed deposit rate and is quite transparent as it is published on the website of the particular bank.

Fixed interest rates on home loans only last for a short period

If you choose a home loan with a fixed interest rate, you should know that the rate is not fixed forever. Refinancing regularly is the only way you are going to get a fixed interest rate for a longer term. Most fixed rates will only last for the first 3 years with a few extending to five years. After that, they are automatically converted to variable rates. Therefore, it is better to refinance regularly in order to get a fixed interest rate again.

HDB loan vs. Bank loan

The main reason why most people prefer HDB loans first is the down payment. Banks have an LTV (Loan to Value) ratio of 80% while HDB has a LTV of 90%. This means that if you are looking to buy a flat valued at $600,000, HDB will lend you up to 540,000 while the bank can only lend you $480,000.

However, HDB loan have a higher interest rate of 2.6 per cent which has not changed for a long time hence convenience if you are looking for more stability. The interest rate of bank loans on the other hand is determined by the bank spread as well as the index.

In most cases, the index used is SIBOR (Singapore Interbank Offered Rate). In rare cases, the bank can use SOR (Swap Offer Rate) which fluctuates depending on the strength of the dollar. You can also get an offer to use bank board rate in which the bank the decided what the rate will be.

Typically, the interest rate on bank’s home loan has been about 1.7-1.9% since 2008 meaning that people with private properties have paid lower rates than HDB borrowers for close to nine years. A lower interest rate translates to lower monthly instalments.

For this reason, you may want to switch from HDB loan to bank loan which is possible but you cannot switch back from a bank loan to a HDB loan.

Switching from HD loan to Bank loan is especially advisable if you are left with about 5-10 years to clear your loan as you do not have to worry much about the fluctuating interest rate since the loan will end soon.

The cost of refinancing your home loan

Refinancing is not free but the cost varies depending on individual circumstances. For example, if your loan amount if high, the bank can give cash subsidies or rebates to cover part of the fee. Some of the common refinance cost include:
· Application fees
This is the fee you are charged to when applying for the new home loan.

· Valuation fees
A valuation fee is charged by the new lender to cover the cost of valuing the property that you offering as security.

· Legal fees
You can also get charged an attorney fee for conducting the closing for lender.

· Land registration fees
These fee is charged to remove the existing mortgage from the previous lender and register the new mortgage to the new lender.

· Discharge fees
This is an administration fee paid to the current lender to clear the existing loan as well as prepare the existing documents.

· Ongoing fees
Some lenders may charge an ongoing fee which ranges from $0 -$750 per annum.

· Title insurance fee
Title insurance is intended to guard against any errors or problems with the transfer with title.

· Break fees
If you refinance your home loan during a fixed rate period, you will be hit with a contract break fee which compensates the current lender for any loss of profits due to your decision to break the contract. Break fee may or may not be charged depending on the existing interest rate movements.

In most cases subsidies and cash rebates can cover the refinancing cost leaving you to pay only a few hundred dollars. All the fee can also be paid by CPF if you have enough money in your ordinary account.