10 Considerations Before You Refinance

As interest is on its way up, more people will be paying closer attention to their mortgage costs.  Even if this is not the first time you do remortgaging, it is always good to revisit some key considerations before you signed on the dotted line.

1. How Early Should You Start?

Unknown to many, you can actually start to shop around for lowest home loan rates as early as 6 months before your current lock-in expires, if any.  This is because even after you signed the mortgage contract, the new lender will usually provide you with a 6-month period to draw down on the facility failing which there will be a cancellation fee.  Still, in an environment where rates are going up, it pays to start this process early in order to lock down lower fixed rates.

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2. Refinancing Versus Repricing?

Repricing means staying on with the existing bank but switching to another prevailing home loan package.  Typically, banks will only quote you a package for repricing around 4 months before your lock-in expires. This means if you sense rates are rising too quickly for your liking, you would lean more towards refinancing rather than repricing especially if the cost of changing banks is insignificant compared to how much you could save on locking down a lower interest rate early.

Of course, this would be over-simplication and there are many other things to consider in this decision.  You would need to do a detailed cost-benefit analysis for each option.  Most people can use the help of a professional mortgage broker.

Besides considering the direct cost and benefit involved like legal/valuation fees versus interest savings, don’t forget there could also be indirect cost and benefit.  And one that we often see is how it almost certainly pays to become a new customer to another bank every three years rather than staying on as existing customer where your interest gets adjusted up after the initial years, and your mortgage peg like FDR (fixed deposit rate home loan) is next-in-line to be raised.  Even if you ask for repricing, you would most likely be slapped with an admin fee.  Contrast that with moving to another bank where the red carpet is rolled out to get your business with the thinnest of margin (or profit) for the bank.

3. Need To Cash Out?

If you are keen to cash out on the private property you purchased long ago where the value would have certainly appreciated substantially by now, but without selling it, the solution would be to cash out or take an equity term loan.  A lumpsum cash will be disbursed to you and you can use that for investments or to pay down your other debts with higher interest like car loans for example.

To do cash out, refinancing would most certainly be preferred over repricing as the latter entails out-of-pocket expenses like admin and valuation fees levied by your existing bank.  There will also be no legal subsidy provided.  Unlike in the case of refinancing, the new bank not only gives you more interest rate options but cover your costs through legal subsidy or cash rebate.  And if you work with established brokerage firms, they would probably be able to get their partner law firms to wavie all additional fees associated to the term loan.

4. Selling The Property?

The next big consideration is how likely would you be looking to sell the mortgaged property soon? If you do that within the lock-in period (typically 2 years) of a mortgage contract, you will be liable to pay a 1.5% penalty as you would have to redeem the loan in full.

Again, many are not aware.  There are banks that offer packages with a waiver on this penalty if redemption is due to sale of the property during the lockin period.  You just have to prove the sale to the bank by way of option exercised.

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5. Looking To Pay Down?

Would you want to make lumpsum repayments to reduce your mortgage for example after you get your year-end bonus?  The same 1.5% penalty (on the amount redeemed) applies if you pay down during the lock-in period.  There are banks who offer packages that allow such partial prepayment up to a certain amount of the outstanding loan like 50%.

Before you decide to pay down especially when using cash, consider the option of an interest-offset account which pays you the same deposit interest as your mortgage interest (up to a certain amount based on your outstanding loan).  This has the same effect as reducing your outstanding loan but yet you retain the flexibility to withdraw back the cash when you need to, for example when the stock market crashes, or when you spot the next bargain deal in the property market which leads me to my next point.

6. Buying Another Property?

With property market on an upswing, it is unlikely any past cooling measures will be relaxed in the foreseeable future.  This means more property owners will need to consider de-coupling as the only way to avoid paying the hefty ABSD (Additional Buyer’s Stamp Duty) for a 2ndproperty purchase in Singapore.

De-coupling is not the same as removing one owner from the loan which is commonly referred to as 2M1B in the industry, or 2 mortgagors but 1 borrower.  That only allows the spouse without any mortgage to get 80% loan-to-value as a 1stmortgage for the next purchase, ABSD is still chargeable.  De-coupling entails transferring of the 50% ownership in the property from A to B by way of a sale.  B assumes 50% of the outstanding loan with the option to pay down the balance or apply for additional new purchase loan for total mortgage to remain the same as before, subject to TDSR and income qualification.  A is no longer an owner and becomes free to buy another property as his first property without incurring ABSD.

The best time to do de-coupling will be during a home loan refinancing exercise, as some banks though few might give legal subsidy for the portion of the loan that is refinanced.  A good mortgage consultant will be able to advise you on the banks who can do that. The subsidy will not be able to cover the legal fees involved for de-coupling which range from $5,000 to $6,500 (for both parties buyer B and seller A), but it helps defray some costs.  More importantly, you should de-couple before you sign onto another home loan package with a new lock-in period as de-coupling is essentially treated like a sale of property and any outstanding loan must be first fully redeemed.

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7. How Long Should The Tenure Be?

We actually go to great length on this topic in another article.  Suffice to say that there are really two drivers for how much interest you pay every month – the interest rate itself, and the tenure of the loan.  And when interest rises to 3% at some point, almost half or 43% of what you pay every month goes to the bank’s coffers.  On tenure, a reduction from 30 years to 20 years brings down the interest component of the monthly repayment from 38% to 27%.

To decide on the optimal tenure, consider how much total interest you like to pay the bank over the long run and how comfortable in terms of monthly cash flow will you be servicing a higher monthly repayment (when tenure is reduced).

8. Fixed vs Floating Rate Home Loan

Again, this is a topic big enough for another article with 6 other factors one should weigh:

– Gap between lowest fixed and floating rate (more than 0.50%?)
– Owner-occupied vs investment property
– Flexibility for paydown
– Size of the outstanding loan
– Stability of one’s income
– Outlook on interest rate and how much one values peace-of-mind

9. Dressing up for TDSR

This point pertains to those with TDSR issues or who might be in-between jobs while seeking refinancing in a bid to bring down interest costs.  It is important that you plan early to give yourself full access to all home loan packages available in the market. To always be in the best position for refinancing, some examples of the things to “get ready” would be:
– Always keep copies of computerized payslips for rolling 12 month-period as that captures recent bonuses paid out unlike tax returns
– Avoid big-ticket spend on credit cards two months before the application (alternatively be prepared to pay down in full)
– Investors with multiple properties need to take note of their various lease renewal dates and apply for refinancing 6-8 months before they expire.

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10. Use A Broker Or Go Direct?

By now I hope you see the complexity involved in mortgage financing which requires careful planning and that is why we have often stressed the need for the service of a full-time mortgage professional.  This is especially so when the service comes free in Singapore, as all brokers are paid a referral fee from the lenders.

In fact, many still do not quite comprehend the function of a mortgage broker and wrongly believe that they will get the short end of the stick as surely the banks would price in this referral fee and they would pay higher interest rate then if they apply directly to the bank.  Not true.  Just think of it as buying a Macbook from Apple Store vs a third-party authorized distributor – the price is controlled and the same, you just get more freebies thrown in if you buy it from Nubox or EpiCentre!  The bank has already built-in the referral fee as part of the distribution costs in the interest rate. There will always be marketing and distribution costs for any product, just that the bank pays its internal sales staff less when there is a broker involved.

For the best Singapore home loan rates, speak to us today for a full mortgage review and start a relationship with your own trusted mortgage consultant.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there.

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