About Refinancing
The Basics of Refinance
Refinance 101
Refinance can save you money. But you can also lose money if you do not refinance at the right time. From the best time to refinance your home to costs and savings of refinancing, we try to provide you a complete knowledge to refinance.
Refinancing (or “Refi” – term more commonly used in U.S.) is a process of switching your loan on a mortgaged property with another bank. In the process you save money on interest as the bank you refinance with provides a lower interest rate. In general, there are 2 types of refinance: Cashing Out or Non Cash Out (Changing Terms).
There is another scenario for refinancing other than saving on interest. It happens when you have equity on your property and you are able to refinance and take cash out. This is also known as Cash Out Refinance or some may call it reverse mortgage or cash back refinance. We will discuss this on types of refinance which includes the rate type you should consider. Do note that cash out equity loan/ refinance does not apply to HDB properties.
Refinancing is not a matter of whether you should or should not. It is a matter of when. Technically you can refinance any time. But your bank may have lock-in period which you may have to pay a penalty if you were to refinance before that. In addition, after your lock in period, your loan interest rate usually goes up and so does your repayment. Economic force changes and you may have a different rate type (fixed or floating) that may favour you for the next 2-3 years. So when exactly should you consider refinancing?
Choosing the best time to refinance is important to save you money. Your bank usually need 3 months in advanced to inform them if you are to continue your loan with them. Many are caught at the last minute trying to refinance their loan. They end up paying a few month of “extra” interest because they were late to inform the bank. Knowing this, let us work backwards the timeline required and start planning early for refinance.
When you apply from your refinance lender, it usually takes about 2-3 weeks for the bank to approve the loan. Add that to the notice for your bank you will need about 4 months from the lock-in expiry. If you really want to read up, do some research (which technically you don’t have to because you have us), that will add up to another month.
So lets give and take, time your refinancing about 5-6 months before the lock-in expires. Newly signed refinance agreements are valid for 6 months anyway. Guess there is a reason that validity too.
All refinancing clients look for the cheapest refinance home loan. Nothing make sense unless you save money. Or in the event of equity refinancing, the cashing out is worth the efforts. You must take note that lock-in period is a norm for bank when they provide home loans. They have to justify and make their efforts worth taking your mortgage. In rare occasions, you may not be subjected to a lock-in period. That would be mean you can afford to refinance any time you see appropriate, having no need to pay any penalty fee.
What are the cost to refinance your home? There are 2 types of fees/ costs your current lender may impose, namely penalty fee and legal fee subsidy clawback. To know if you should refinance is to equate the fees payable between your current lender and the refinancing bank, as well as your interest savings.
So there are 2 scenarios of cost savings:
- Interest Savings from refinance > Fees payable to lender
- (Interest Savings from refinance – Cost of Refinancing) > Fees payable to lender
Scenario 1 would be a no-brainer to refinance if there is no fee payable to the lending bank and that happens after your lock-in period. Interest savings is a given as the bank interest rate usually goes up after the lock-in period. In this case you refinance at zero closing cost.
Scenario 2 can happen if you loan amount is small and your interest savings is little. The refinancing bank is also likely to impose a mortgage refinance closing costs which can range from $300-$500. We consider this is still a low cost mortgage refinance since the interest savings is usually much more.
For further information on cost savings, please refer to costs of refinancing and savings section below.
There are 2 types of interest rate refinancing banks offer. The fixed-rate and the floating-rate loan.
For example, you may be locked-in for your fixed rate home loan at say 2.0% p.a. interest rate. The economy is not performing well and interest rate is expected to reduce over the next few years. If you are near the end of your lock-in period, you may consider refinance to a floating rate because you get to save money over the next few years as interest rate drops.
On the other hand, say you currently have a floating rate loan at 1.5% p.a. and the forecast is interest rate is expected to increase over the next few year, you may consider refinancing to a fixed rate with average of 1.4% p.a. over the next 2 years. Your refinance interest rate is fixed so you do not have to worry about the increasing interest rate and you get to save a lot of interest.
Both scenarios above are on the assumption that the cost to refinance is worth the switch. Meaning you do not need to pay penalty after the lock-in period or the break within the lock-in period is cheap enough compared to the interest savings. Of course there are other considerations that you may have to take note too.
Costs to Refinance (Non Cash Out)
The first question from many clients is: What is the cost to refinance my mortgage? Let us take a look. The costs of refinancing can incur with your current lender and the refinancing bank are:
- Current Lender: Penalty Fee and legal fee subsidy claw back
- Refinancing Bank: Closing fee, legal fee and valuation fee
The penalty fee, usually 1.5% of the outstanding loan amount, will happen when you refinance before the end of the lock-in period. If your bank had subsidised your legal fee when you purchased your property, they can also impose a claw back of around $2,000 – $3,000.
On the other hand, the refinancing bank can ask for legal fee and other fee when you refinance. However, refinancing banks typically are willing to waive such fees if you loan amount is $500,000 or more.
Therefore to enjoy a zero refinance cost, you should aim to refinance after your lock-in period with an outstanding loan amount of at least $500,000 with the refinancing banks. However nothing is ever cast in stone as sometimes banks do provide incentives and promotions. The average cost to refinance is $300-$500 anyway.
Savings
Looking beyond the fees to the current lender and the refinancing bank is the savings you get to enjoy by refinancing even if it may cost you some money to pay either party. If you get to save $5,000 versus paying some fee to one or both parties of say $2,000 in total, A saving of $3,000 may still worth your efforts to refinance. Sometimes you can talk to your current lender to reduce the fees. For estimated interest savings from refinancing, do check out our rates comparison.
At RefinanceGuru, we have your needs cover and understand there could be other considerations for refinancing too.
Each property is unique. So is each refinancing’s background. While we want you to refinance through us, we also want to make sure the decision you make is best for your situation. There are some areas you might need to take into considerations such as:
Selling Your Property →
Coming to the end of your lock-in period, you have to think if you are going to sell your property soon before considering refinancing as it may cost you more when you need to break your new lock-in period.
Re-price vs Refinance →
Sometimes refinancing may not be your only way out. As much as we want to do your business, we have your needs in mind. Re-pricing happens with you refinance with your original lender. But you ask to convert to a different loan package. This usually comes with a small refinance charges of a few hundred dollars.
Having said the above, most clients do not see re-pricing viable as many times refinancing with another bank is a better deal for their savings. Administration fee for re-pricing is usually $500-$800 while refinancing legal and valuation fees is around $300-$500 (if not waived).
Financial Cash Flow →
Most refinancing occurs because the interest savings mean a lower repayment amount every month. But a substantial upfront payment (refinance costs) for a lower repayment per month does not mean you have to take the deal.
What you need to weigh eventually is your upfront payment versus the total savings and the monthly repayment you get by refinancing. These affect your current and future cash flow. It is your call.
Tenure & LTV Ratio →
Do take note that the maximum loan tenure for HDB property is 30 years while private property is 35 years. In addition, if you loan tenure is more than 30 years or age 65 years old, you will a lower loan to value (LTV) limits.
MAS has provided the LTV limits, minimum downpayment and calculation age for joint borrowers on their website.
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