10 things to consider before Refinancing your Home Loan

10 Things To Consider Before Refinancing Your Home Loan

Angeline C (iCompareLoan.com)

If you are paying an interest rate of 2.5% or more on your home loan, then it is probably worthwhile considering refinancing the loan to lower your interest expenses.

 

In this article, we explore 10 things you should consider before refinancing your home loan.

 

1. Refinance or reprice?

 

Before considering refinancing or switching from an existing home loan to a new home loan with another financial institution, it could be worthwhile talking to your current financial institution to explore the options they can offer to you, which is also known as repricing.

 

2. Lock in period

Do check if your loan has passed the lock in period. Refinancing your home loan before the lock in period will lead to fees, as a result of which, refinancing may not make sense.

 

Typically, for property under construction, the lock in period will end after the property receives the Certificate of Statutory Completion and the loan has been fully disbursed.

 

3. Interest rate

Interest rates have been creeping up over a 2-year period but if you compare over a 10-year period, rates have come down significantly.

 

Is the current interest rate higher or lower than the one you are paying on your home loan?

 

Are interest rates expected to go up or down?

 

If interest rates are expected to go down, you can consider holding off the refinancing till later.

 

4. Home loan offerings

Today, consumers have a wide range of home loan packages to choose from compared to 10 years ago. For example, the fixed deposit pegged home loan introduced by DBS in 2014.

 

Home loans could also be tied up with programmes offered by banks such as the DBS Multiplier, which rewards customers with a higher interest rate on their deposits if they transact more with the bank, such as getting a home loan and crediting your salary to the bank. Do consider the offerings in the market.

 

5. Potential Interest cost savings

Can a new loan offer you savings? Typically, a home loan package offers attractive rates for the first three years, following which the interest rates are adjusted upwards, which usually coincides with the end of the lock in period, offering borrowers a good opportunity to relook at their loan.

 

Let’s take a look at how refinancing can lead to potential savings over a 3-year period.

 

Current loan:

Outstanding loan amount: $400,000

Interest rate: 2.5% fixed for 3 years
Tenure: 30 years

Using our Refinance mortgage payment calculator, the monthly payment is S$1,580.48

Year	Monthly Installment	Monthly Principal Paid	Monthly Interest Paid	Annual Principal Paid	Annual Interest Paid	Balance
1	1,580.48	747.15	833.33	8,965.76	10,000	391,034.24
2	1,580.48	765.83	814.65	9,189.90	9,775.86	381,844.34
3	1,580.48	784.97	795.51	9,419.65	9,546.11	372,424.68

Total interest paid over 3 years is $29,322

New loan:

If you are able to refinance your loan to a lower rate, for example:

FHR-18 + 0.9% (Assume that FHR-18 = 0.6%) = 1.5%
Using our mortgage payment calculator, the monthly payment is S$1,380.48

Year	Monthly Installment	Monthly Principal Paid	Monthly Interest Paid	Annual Principal Paid	Annual Interest Paid	Balance
1	1,380.48	547.15	833.33	6,565.76	6,000.00	393,434.24
2	1,380.48	888.69	491.79	10,664.25	5,901.51	382,769.99
3	1,380.48	902.02	478.46	10,824.21	5,741.55	371,945.78

Total interest paid over 3 years is $17,643.

The difference in interest payment over 3 years ($29,322 – $17,643) is $11,679

 

6. Personal factors

Refinancing a home loan would mean reassessing your credit standing, etc.

 

Has your salary increased/decreased since the last assessment?

 

Have you taken up more loans?

 

Have you been paying your bills on time?

 

These will affect your credit score and willingness of the bank to refinance your loan.

 

7. Customised solutions

Banks can come up with customised solutions to meet your needs whether it is to change the loan tenure or lower your monthly payments.

 

Find the bank that offers you the best solutions.

 

However, do note that generally if you stretch your loan tenure over a longer period, the interest payable at end of loan is higher.

 

8. Conveyancing Legal fees

Refinancing your loan would involve legal fees amounting to a few thousand dollars. Take these into consideration when weighing the benefits/costs.

 

9. MAS Regulations

Since taking up your current loan, there has been several loan changes. Read about the chronology of MAS regulations here.

 

Do check how it affects your ability to borrow.

 

10. Need for cash?

Refinancing a home loan can offer you an opportunity to unlock cash from property. Read up more on cash out refinancing.

 

 

For more information on this, you can contact a mortgage loan broker to help you.