5 things to look out for when you have to refinance

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“When I have to refinance what are the things I should look out for?” This would be a question on many homeowners’ minds when they are searching for a fresh home loan.

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Refinancing your mortgage basically means that you are trading in your old mortgage for a new one, and possibly a new balance. When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one; this is the reason for the term refinancing.

When you refinance your home loan you basically lower your fixed interest rate to reduce payments over the life of the loan, to change the duration of the loan, or to switch from a fixed-rate mortgage to an adjustable-rate mortgage (ARM) or vice versa.

Most homeowners would need to try and answer 5 questions when they have to refinance

1. Do I have to worry abour Clawback and Lock-In periods?

Most loans have a 3-year timeframe (aka Clawback period), in which early full repayment of the loan can result in a refund of subsidies such as legal and administration cost. Typically, there is also a lock-in period of 2 to 5 years, during which any redemption of the loan will be subjected to a 1.5% penalty of the redeemed amount.

Do note that some loan packages do not have a Clawback period or a Lock-In period.

Anyway, if the loan happens to have these conditions, the borrower will have to consider whether the benefit outweighs the cost of refinancing during the penalty interval.

Returning to our previous example of a $800,000 loan quantum,

• Estimated interest saving from refinancing = $35,610.87

• Estimated cost of refund of subsidy = $3,000

• Estimated cost of early repayment penalty = $800,000 x 1.5% = $12,000

• Total Saving = $35,610.87 – $12,000 – $3,000 = $20,610.87

This example shows that refinancing during the penalty period can still result in savings. To calculate the months it takes to breakeven, or reach the total cost of $15,000, we present it in the below table.

 Monthly Installment for Current LoanMonthly Installment for New LoanMonthly SavingAnnual SavingAnnual Saving to Reach the Cost of $15,000No. of Months
Year 1$3,592.36$2,760.96$831.40$9,976.80$9,976.8012
Year 2$3,592.36$2,950.84$641.52$7,698.24$5,023.207.83
    Total:$15,000.0019.83

The borrower will need 20 months to breakeven. Hence whether it is worthwhile to switch will depend on his financial circumstances.

2. What if I have two loans with different expiry dates?

For some financing institutions’ packages, they come with the condition that all loans have to be redeemed on a specific day. But each loan in the package has a different expiry date; thus borrowers may still have to bear the penalty of repaying the loan with a later expiry date.

An example:

Package A has a

• home loan of $1,250,000, commencing on 15 January 2009, expiry date: 15 January 2012

• term loan 1 of $500,000, commencing on 27 February 2009 , expiry date: 27 February 2012

By redeeming the home loan (which has to be done on the expiry date to avoid penalty charges), the borrower will also have to redeem term loan 1 on the same day. As the expiry date of term loan 1 is 27 February 2012, he will incur a 1.5% penalty on $500,000.

3. Are you lured by lower interest rate when changing from a fixed to a variable loan package?

Borrowers should be aware that interest rates are prone to fluctuations. Hence they should be prepared for the event of a rise in rates and perhaps check out our interest rate sensitivity calculators. They should calculate the monthly installment and interest payment for two scenarios: a low interest rate and a high interest rate environment.

4. How many years into the current mortgage are you at?

Usually, as the duration of the loan progresses, more of the installment payments will go toward the payment of the principle. This will build up equity. In the beginning of the loan, installment payments tend to go toward the settlement of interest. Hence, refinancing at the later stages of the mortgage may not be a good idea as it restarts the amortisation process. Detailed calculation will be needed to ascertain whether it is worthwhile to switch.

5. Do you have to refinance when you are moving house?

If home owners are planning to sell their home within a few months, it is usually unwise to refinance. This is because it takes some time before the savings exceed the costs of refinancing. Secondly, they may incur the penalty of the clawback period or lock-in period of the refinanced loan or legal conveyancing fees, valuation fees and other incidental fees.

Besides these 5 questions which must be carefully answered, homeowners who want a new best home loan should also be careful not to fail in two areas.

  1. When you have to refinance don’t fail to get your credit together

A credit score is a number that the lenders consider before they determine if they should approve your application for loans in Singapore. It is a joint effort between all the major lenders here, where data about consumers’ credit history is pooled together and aggregated. Within the aggregated data, lenders would have access to records that show the number of accounts that you have across different banks, and your payment history.

After crunching the available data, each account holder is then assigned a credit score. This indicates how good or bad of a risk you might be to the lender as a customer. The higher the number (up to 2,000 and AA rating), the better your credit score.

Although the the exact weightage of how your credit score is calculated isn’t public knowledge, the factors that the Credit Bureau of Singapore (CBS) uses in determining your credit score is.

Factors like usage patterns of loan facility (e.g. if you have been making large purchases or transactions lately); your recent credit account activity (The number of credit facilities an account holder has is considered by banks as liabilities as they may perceive that you are over-extending yourself); and your account delinquency data, or how you have fared as a customer (this means where possible, always avoid making late or partial payments for your facilities).

Other factors considered by CBS include your credit account history, or how long you have been a customer (factors like if you have you been a loyal customer of your bank since you received your first credit card from them); how much available credit do you have (your credit score is affected by the number of accounts you have with various banks in Singapore); and enquiry activity of how many organisations have asked about you (having too many enquiries might indicate to banks that you could be taking on more debt than you should).

So if you looking for loans in Singapore, be disciplined in your spending habits to avoid going into debt, limit the number of credit facilities that you have across the different lenders, avoid defaulting on your repayments, and always paying your bills in full, on time. Also, avoid applying for accounts that you may not need.

2. When you have to refinance, don’t fail to compare lenders

One recent survey said that nearly half of all homeowners requested a quote from just one lender, and that consumers who received rate quotes from multiple lenders cut their interest rate by as much as 50 basis points (0.50%). That could be a savings of thousands of dollars. Your current lender or local bank may not offer the best deal.

A good refinance advice anyone could give you is to compare rates and fees from three to four lenders before you decide on one.

With a good number of local and foreign financial institutions here, the choice of a lender and its packages can be mind boggling. Imagine having to compare over hundreds of different loan packages and wondering which is best for you. Even if you are a specialist in finance, differences between the loans in Singapore are not so straight forward, because there are quite a few variables.

This is where an independent loan specialist maybe useful for you in your search for a loan which is the right fit for your needs. Without any partiality, the independent loan specialist can compare a range of products and lenders. This will help you save time and money, avoid confusion, and improve your chances of getting approved, as well.

So if you are applying for home loans in Singapore, the lesson really is – never settle for the first loan you are offered as it might not be the right fit for you.

If your credit worthiness is suspect, getting the right loan may be more difficult but certainly not impossible, especially if you have the right independent loan specialist to help you in your search. Ad the best news is, the services of an independent loan specialist is often free.

For starters, you should read up on good refinancing guide so that you have some basic understanding of how an independent loan specialist can help you in your search for the right loan.

Written by Ravi Chandran

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