Ravi Chandran
When you switch loan, you are refinancing an existing loan with another lender of financier
When you switch loan, you are refinancing an existing loan with another lender of financier. For instance, your current outstanding loan is $1m, and your interest cost is 2%. Just for ease of calculation and approximation, your interest cost is $20,000. Over 3 years, you will have paid around $60,000 of interest.
If you switch loan over to another bank with an interest of 1.2%, your 3 years interest cost would amount to approximately $36,000. You would easily have saved around $24,000 over a 3 year period. (Note: All calculations are estimates and used for references only).
You could check out the bank rates to switch loan using a refinancing home loan wizard or talk to a Mortgage Broker. When you switch loan you should try to get your hands on Refinance Home Loan Report™. You can get a similar report for free from a mortgage borker or ask your property agent to prepare one for you. Refinancing is applicable for Home Loan (Residential) as well as Commercial and Industrial property loans.
Certain rules are applicable before you switch loan and you will still need to meet TDSR before refinancing. Most of all, finding a mortgage provider and loan that meets your refinancing needs can be a complicated process and customers always have several questions.
The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in two ways:
- By obtaining a lower interest rate that causes one’s monthly mortgage payment to be reduced.
- By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15- year loan might result in higher monthly payments, but the total of the payments made during the life of the loan can be reduced significantly.
People with refinancing needs also seek to convert their adjustable loan to a fixed loan.
The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.
A third reason why homeowners refinance is to consolidate debts and replace high-interest loans with a low-rate mortgage. The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc.
In many cases, people who want to switch loan believe that debt consolidation will result in savings.
The answer to the question “Should I refinance?” is a complex one, since every situation is different and no two homeowners are in the exact same situation. Even the conventional wisdom of refinancing only when you can save 2% on your mortgage is not really true. If you are refinancing to save money on your monthly payments, the following calculation is more appropriate than the rule of 2%:
- Calculate the total cost of the refinance – example: $2,000,
- Calculate the monthly savings – example: $100/month,
- Divide the result in 1 by the result in 2 – in this case 2000/100 = 20 months. This shows the break-even time.
If you plan to live in the house for longer than this period of time, it makes sense to refinance.
Can a new refinancing 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 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.
Refinancing a home loan would mean reassessing your credit standing. You have to consider questions such as:
- Has your salary increased/decreased since the last assessment?
- Have you taken up more loans?
- Have you been paying your bills on time?
These factors will affect your credit score and willingness of the bank to refinance your loan.
Sometimes, you do not have a choice – you are forced to refinance. This happens when you have a loan with a balloon provision, but with no conversion option. In this case it is best to refinance a few months before the balloon comes due.
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.
Whatever you choose to do for your refinancing needs, consulting with a seasoned mortgage professional can often save you time and money. Make a few phone calls, check out a few web sites, crunch on a few calculators and spend some time to understand the options available to you.
