When it comes to housing loans, many people do not refinance. A significant number are unaware they have the option of switching their loan to another financier; others are simply apathetic. They stick with their very first lender and the “reward” for such loyalty tends to be higher interest rates. Due to the magnitude of housing loans and the tenure that the loan is amortized over, the interest we are talking about here can easily stretch from thousands to hundreds of thousands of dollars. Take a look at the following factors to see whether it's time for you to consider refinancing.
Current interest rate
It is definitely a good indication for you to explore refinancing when your current interest rate is higher than available housing loan packages on the market. A first step to take is to go back to your current bank or financial institution and ask them to revise your package, otherwise known as repricing. If your lender comes back with an offer, it will usually be better than your current one. You can then compare this offer with offers from other lenders to see whether you should switch or stay put.
Lock-in and clawback periods
When you take up a housing loan, there may be a lock-in period where your mortgage lender will charge you a penalty fee, usually a percentage of your outstanding loan amount, if you were to fully repay your loan. Almost all housing loans also come with a clawback period where the lender will claim back “freebies”, such as legal subsidies, that they “gave” you when you take up your housing loan (Note: lock-in period is separate from clawback period). It may not be worthwhile for you to refinance due to such costs.
The larger your loan amount, the greater your savings for the same decrease in interest rates. For example, 1% on a loan of S$100,000 is much less than 1% on a loan of S$500,000. However, fixed cost to refinancing, which comprises mainly of legal fees, do not vary much with loan quantum. The difference between your current and refinancing interest rates, therefore, has to be bigger for a relatively smaller loan as fixed cost eats into a more significant portion of your interest rate savings.
Perceived interest rate movements
Your view on how interest rates is moving can be a factor when considering whether you should refinance. If you are currently on a fixed rate package and believe interest rates are dropping, you may want to refinance to a floating rate package. Conversely, if you are on floating rates and believe interest rates are rocketing, switching to fixed rates may be a good choice.
Personal financial assessment
If there is a change in your financial state, you may want to vary your package details via refinancing. For example, you are starting your own business and do not want volatility in other areas. Give some thought to taking up a fixed rate package. Maybe you want cash to invest in another property. Consider increasing your loan quantum. Or your monthly income has increased and you want to minimise interest payments. Contemplate reducing your loan tenure.
If looking through this article is giving your a headache or you simply want to save yourself the trouble, consult a housing loan advisor (e.g. www.myhousingloan.com.sg). Housing loan advisors not only frees up your time but also do not charge any fees to help you get the best deal. Refinancing does not have to be a tedious process.