The Ultimate Guide to Refinancing your home loan in Singapore

Among the 1000 things you need to do today, you wake up thinking about your refinancing.

refinancing-home

To the uninitiated, you may ask, what is refinancing of home loan and why do it ? Simple. The beautiful loan rate you got hitched to 3 years ago no longer looks the same. With that, it’s time to look around again.

But that surfaces a whole lot of questions. Should I refinance ? whats the best mortgage loan in Singapore? Whats the current refinancing rates ? Is Maybank, DBS, OCBC, Stanchart home loans better ?(actually there’s alot more banks) Comparing refinancing home loan packages in Singapore can be quite a tedious task drowning in a sea of information.

Facts are facts – everybody needs to eat, breathe, and take care of their families, so you are often told that what they have are the best. Unfortunately, that is not an easy thing to validate. Not easy until today: in the next 15 minutes, you will find out all the blind spots you need to cover to keep your borrowing cost in check.

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Are you eligible to refinance?

Knowing how to refinance (and what package to refinance to) is important, and that will be focused later in this guide. For now, we’re focusing on whether you are eligible to refinance, based on your current loan package. This could be something as simple as still being held captive in your current lock-in period, or it could be because in the past 2-3 years, you bought a shiny new car and you are still paying off the loan on that.

These are some of the many factors that can make and break your eligibility to refinance, and in this section, we will delve deep into it!

  • Lock-in periods

Most packages, both old and new, often have lock-in periods for the first 2-3 years. The catch is that there’s usually a penalty involved if you choose to move your loan elsewhere while these periods are still in effect.

To ensure that business is meaningful (to the bank), you will usually be held hostage during the first 1-3 years of your loan. It is probably found in the section of your (now forgotten) letter of offer. Check your files again – the penalty is usually about 1.5 – 2 percent of the outstanding loan amount and that’s quite a sting. Note that if you are currently on HDB home loan, there’s no such restrictions. You can refer to our HDB home loan guide for more details.

  • Interest review dates

The second hurdle to clear before we even start the race is to find out if there’s a specific time and day that you can only take action. If not, you’re subject to paying for a fee again. That said, however, this is usually only applicable to packages which are SIBOR or SOR linked.

The banks peg the lending rate onto a reference rate like SIBOR or SOR; these rates are reset monthly or quarterly, and the banks take advantage of this to come up with an excuse stating that you have to redeem the loan on the day the loan is supposed to reset.

This is just so you will have to stick with them for at least a little while longer, and the fine usually amounts to another 1.5% on the total remaining loan amount.

This date starts from the day your loan is disbursed, and every monthly/ quarterly/ yearly, depending on the reference rate of your package. Put simply, we should only execute on the next available redemption.

  • Thereafter rates

The next thing to check is when your higher rates will kick in as you’ll want to refinance 3 months prior. The golden rule here is to bring in your laundry before it rains; things are not all well and good yet. You may not be in the lock in period, you may not have an interest review date to worry about, and you may have all the freedom in the world to make the best decisions for yourself, but you sit on it.

rates
The reason why you’re sitting on it is because the bride you married a couple of years ago has aged a little, but she still looks somewhat okay. You have not woken up to a horror story (yet). This horror story becomes apparent when there is a sudden jump in the borrowing costs that you are paying, and that could be as soon as tomorrow – or that may already even happened last week.

The bottom line – the headline-attractive interest rate that first had you enthralled could soon be changing, and changing very dramatically at that.

Let’s put some figures in perspective: if you took up a loan between 2008 to 2012, your first 3-year SIBOR margins might be 0.7%. Thereafter, it is more likely to be 1% or 1.25%. Assuming SIBOR is 1% today, you may still be looking at 1.7%. However if that were not the case, then the rate would have jumped above and beyond 2% thanks to the change in margins.

Don’t blame anybody – it’s in your contract. It’s just time to get moving. The right time to move is 3 months before the new rates kick in, because all banks will require you to serve a 3-month notice before you port your loan over to another financier.

  • Subsidy Clawbacks

The final thorn in the flesh left to pull out is to make sure that you have fully benefitted from your existing loan package before you say your last goodbye. Most packages – especially those before 2013 – would have provided you with sweeteners to secure your business.

These are the legal and valuation subsidies provided by your existing financier. They are not free, unless this relationship is at least 3 years old. What do you stand to lose? Anything from $2,000 – $5,000.

  • TDSR
    We are almost good to go! But time to look in the mirror – has anything changed? No, not with how you look, but the state of your current finances since you took up the last mortgage. This is the final stage for your consideration; however, the math is not easy.

The good news is that while it can be complicated, it is not rocket science, and there’s help available. There are people around who can offer genuine advice and an unbiased point of view before you commit yourself, again, for the next 2-3 years. And I’m not talking about those people who say that their products are the best.Because let’s be honest, they are saying so only because those are the only products they can sell to you. In fact, this is one of the myths we covered in our article on the 7 myths of home financing.

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Best mortgage rates

Now that we have taken care of the past, it’s time to gaze brilliantly towards the future. The instinctive question that is in everyone’s head, especially at this juncture: where to find the best rates?

Why best rates? Why not the cheapest? Isn’t cheapest the best? Well, in this day and age, we are all heartened to find ourselves smarter and knowledgeable enough to be aware that cheapest is not always best. So let’s keep that momentum and pay attention.“Best”is one man’s meat but another man’s poison, so it’s time to find your steak and the way you like it now.

  • Fixed Rates (1-5 years)

If only fixed rates last forever…Among all the mundane, boring things in the world, this constant would have been a preferred. Fixed rates* usually only last for 1-5 years – the longer the fixed tenor, the more expensive the rates. Since fixed rates are not for eternity, we have to examine what kind of reference rates apply on your loan after the fixed period and we will talk about these reference rates now.

*We are good under these packages for the next 1-5 years; however, the floating rates specific to your package thereafter will apply and it is important again, not only at that point in time, but now when the ball is still in your court to know what they are and how they may affect your decisions again in time to come.

  • SIBOR (1, 3, 6, 12 months)

SIBOR stands for the Singapore interbank offered rate. It is based on the interest rates used by banks in Singapore and the rate they charge one another when they borrow among themselves. SIBOR packages come in denominations of 1, 3, 6 and 12 months, and some banks may allow you to switch amongst these tenors.

Here’s how the trend for the past 10 years look like:

siborAssociation of Banks in Singapore, Redbrick Mortgage Advisory

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  • SOR (3 months)

“The synthetic rate for deposits in Singapore Dollars (SGD), which represents the effective cost of borrowing the Singapore Dollars synthetically by borrowing US Dollars (USD) for the same maturity, and swap out the US Dollars in return for the Singapore Dollars.” – abs.org.sg

The important thing you need to note for the swap offer rate (SOR) is that it is more volatile than SIBOR because exchange rates are involved.

Here’s how the trend for the past 10 years look like:

SORAssociation of Banks in Singapore, Redbrick Mortgage Advisory

  • Board rates

A library of rates determined internally by the bank. Usually lower at onset, they become increasingly mysterious as time goes by. If it changes, you only have 30 days to act and react, assuming you could do something about it.

They are usually described as a combination of SIBOR, internal cost of funds and associated business costs. You may find more description listed in your contract.

With board rates, there are no historical trends whatsoever.

  • Fixed deposit pegged rates (18, 36, 48 months)

These are the simplest reference rates to understand, but beware – they are not the easiest to predict. They are basically your fixed deposit rates, but the references are strategically chosen. Most banks don’t provide a long and meaningful historical trend of their rates. Instead of the 6-12 months FD rates that are more familiar to our mums and dads, the longer, more obscure, less heard of 18, 36 and 48 months are used. No one knows why, or is it really? Most people believe they are more stable and transparent. The important takeaway here is that ultimately, they are still determined by their respective institutions.

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Other Fine Prints You Should Take Note Of

You’ve gotten a hang of the rate types available and you’re ready to make a decision. But wait! Before you do so, there are still a few pointers to take note of. In this next section, we cover the fine prints that came with your contract. And if you’re thinking it has to do with more fines and charges, then you’re right.

But don’t worry, the future is not that bleak (yet), not as long as you read on! Take note of all these pointers and you’re definitely good to go!

  • Reference Rate

Reference rates can range between a Fixed Rate, floating rates pegged to SIBOR, SOR or the internal Board Rates determined by each financial institution.

  • Lock-in periods

Lock-in periods define the amount of time one would have to keep the mortgage with the bank. It usually last anytime between 1-3 years; however, there have also been instances of lock-in periods of up to 8 years. Also, if you choose to redeem the loan (either due to full settlement, refinancing or selling the property) before it is due, there is a chance you will chalk up pre-payment penalties.

  • Pre-payment penalties

Pre-payment penalties are usually affected during the window of lock-in period. This penalty ranges from 0.75% to 2% of the loan amount pre-paid.

  • Interest reset dates

Applicable to SIBOR or SOR packages. Certain banks may state that you can only redeem the loan on specific dates, such as the reset date of your loan. If you fail to redeem the loan on such dates, you may be subject to a penalty ranging from 0.5% to 2% of the loan amount redeemed.

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  • Cancellation fees

Should you choose to withdraw before loan disbursement, you may be subject to cancellation fees. This is applicable between the time you take up the loan offer (i.e. sign on the loan agreement) and the day the loan is disbursed. Cancellation fees can span between 0.5% to 2% of the loan amount cancelled.

  • Subsidies

When purchasing commercial properties, or refinancing commercial or residential properties, financial institutions may offer subsidies to spur customers on in taking up home loans. There are a few types of subsidies available and they include valuation fees, legal fees and free fire insurance premiums.

  • Reimbursement clauses

The aforementioned subsidies usually have a minimum period for the customer to hold on the loan, failing which all subsidies would have to be paid back to the bank. This is to ensure it is still profitable for the financial institutions.

  • Pricing structure (step up, step down, flat)

Depending on the bank, there are 3 types of product pricing structures: step-up, step-down and flat. Step-up structures are where the loan gets increasingly expensive; step-down structures are where loan gets cheaper.

  • Conversion fees

Most banks in Singapore operate home loan packages on a step-up basis, so it is necessary for you to go back to the bank to discuss the terms of the loan. The banks may entice you by having conversion fees waivered; however, there are others that will charge you a fee. This fee can rage from $500 to $5000.

  • Admin fees/processing charges

Admin fees or processing charges are typically more commonly found in commercial and industrial properties, when obtained under a corporate organization. You may have to fork out anywhere between a few hundred to a few thousand dollars to cover these fees and charges.

loan-refinancing

Sure, refinancing in Singapore is no mean feat. You need to get yourself acquainted with all these boring technical terms. However, we assure that it is worth every bit of your time. Imagine going for a few nice holidays for ‘free’ through the money you save in interest repayment. We are talking about approximately 5-figures in saving. This is no exaggeration, since our home purchase is one of the biggest investments in our lives. With that said, if you are ready to take the next step, feel free to chat with us.

Check the latest home loan rates