Types of Refinance

What are the types of Refinance Mortgage Loans?

In general, there are 2 ways to refinance a home: Cashing Out and Non Cashing Out (Changing Terms). Non cash-out refinance is more common in the market. But if you have bought your property sometime ago and have most of your principle loan paid, you might want to look at refinance mortgage to get cash where you can deploy and use the extra cash. For the benefit of this page, we shall discuss more on non cash-out (changing terms) refinance. If you are looking into refinance your home loan to get cash, do visit our cash out refinance page.

Cash Out Refinance

Refinance to get cash happens only when your property value is much higher than the remaining loan. You are sitting on equity on your home and you can encash that equity.

Refinance and cash out is a heavy topic and we have a separate page on that.

Non Cash-Out Refinance

You can do a non cash-out refinance by changing terms from your previous mortgage. The terms that involves during refinance are:

The refinance loan amount;
The refinance interest rate type; and
The tenure of the refinancing loan.

1. Refinance Loan Amount

You can decide on the loan amount when you refinance. If you increase the refinancing loan, you are cashing out. Do note a cash out mortgage loan is subjected to the approval of the bank based on LTV (Loan to Value) limits and TDSR (Total Debt Servicing Ratio).

You can refinance the principle outstanding with your current bank to the refinancing bank. This is the common refinancing deals in the market. Note the bank usually absorbs all fees if the refinance loan amount is $500,000 or above. Banks will impose a processing fee of $300-$500 is the refinance loan amount is less than that. The minimum loan amount is $80,000 and $100,000 for HDB and private housing loan respectively.

Lastly, you can make use of the chance to make additional downpayment to decrease the refinance loan quantum.

2. Refinance Interest Rate Type

This is probably the most important consideration when you refinance. Most owners choose interest only refinance and transfer the outstanding loan amount and remaining tenure of existing lender to the new refinancing bank.

Home owners all want to have the lowest refinance home loan rate. There are 2 types of rates namely floating or fixed. Either one can help you save more in the long term.

Floating Rate

Floating rate means the interest rate fluctuates according to bank’s benchmark rate. It is usually lower than the fixed rate. Floating rate can be pegged to either to SIBOR/SOR (Singapore Inter-Bank Offer Rate/Swap Offer Rate), MBR (Mortgage Board Rate) or FHR (Fixed Deposit Home Rate).

SIBOR/SOR

The bank adds a certain percentage to Sibor. Meaning if the current Sibor is 0.55%, the bank may add 0.65% which adds up to 1.2% which is the float rate the refinancing bank offers you.

Your refinance float rate changes every month or every 3 months when you choose a 1-month (1M) or 3-month (3M) Sibor respectively.

Sibor rate is considered transparent as it is an index not controlled by the bank and is a public information. In fact you can monitor Sibor yourself.

MBR

MBR is an old traditional rate bank offers for home loan. It is determined internally by the bank itself. Each bank has its own discretion to adjust the rate up or down.

MBR is seen as less transparent as the bank can adjust the rate to its own liking and you can do nothing as you are locked in for the duration you signed on to.

FHR

This floating rate type is pegged to fixed deposit rates (FD). Generally it gives some sense of security/ stability because we think banks usually do not offer high FD rates. The other competition for banks FD is the Singapore Saving Bonds which can have an impact on Banks’ FD rate.

FHR is less volatile compared to SIBOR/SOR. But again, the rate is subject to change at the bank’s discretion. There are different FD rates for different ranges of deposits and time duration taken to average the rate. For example, FHR8 can mean prevailing 8 months Singapore dollar fixed deposit interest rate of the Bank for amounts within S$1,000 to S$9,999. The bank then adds a certain percentage to that rate and offer you for refinancing.

You may see FHR as a hybrid of the volatile SIBOR/SOR floating rate and the fixed deposit rate.

Most property owners choose either SIBOR/SOR or FHDR to refinance their mortgage. In fact SIBOR/SOR has gained a lot of traction since 2008. If you still have question or needed some help, feel free to contact us.

Fixed Rate

Fixed rate as it word means the rate providing by the refinancing bank is fixed over the period of lock-in for your refinancing loan. This fixed rate is not subjected to changes over the lock-in period. However the rate may be fixed over the entire lock-in or may vary from year to year which is stated upfront when the refinancing bank offers you.

Which Rate Type to Choose?

General rule of thumb for choosing which rate type is as follows:

FLOATING RATE

Floating rate is favoured when:

Interest rate is likely to fall or remain low;
You don’t mind the fluctuations in the refinance rate every month or every 3 months;
You like to monitor the rates (you don’t actually have to).

Sibor changes everyday. So the option of choosing 1-month or 3-month float rate is really a personal preference. So if you are already choosing a floating interest rate type and you are into micro-managing your refinancing rate, choose a 3-month float rate when you think Sibor is likely to increase over the next few months. It locks in the current rate for the next 3 months.

The lock-in period varies from 1-3 years. And usually a higher interest float rate for a shorter lock-in period.

FIXED RATE

Fixed rate is favoured when:

Interest rate is likely to rise;
You want certainty in your monthly repayment;
You don’t mind paying for certainty.

The lock in period varies from 1 to 3 years.

Do note that for both rate types, the bank typically will have a lock-in period of 2-3 years. Banks that offer 1 year lock in are usually offering MBR or FHR rates. In rare occasion, the bank does not have a lock-in period.

There is no crystal ball to tell you exactly what might happen in the future. Your refinance option for the rate type is purely based on the probably of outcome due to market sentiment.

3. Refinance Tenure

Refinance tenure affects your monthly commitment to repay the bank. Longer duration to repay means a lower monthly repayment. But is also means you pay more total interest. Shorter tenure means a higher monthly commitment to repay. When you refinance, you can recalculate your refinance tenure.

Do take note the maximum loan repayment period for refinancing banks is 35 years for HDB dwellers and 30 years for private properties.

Use our refinance calculator to decide how much is your month repayment for various refinance loan tenure by transfering your outstanding amount with your new refinance interest rate.