Low interest rates have begun to appear more frequently onto headlines of property articles and that could signal a shift towards property refinancing.
The important thing to note about loans is the interest rate involved. News had been rampant over the historic low of interest rates and there will be significant savings if refinancing is done on the home loan that you took five, ten or fifteen years ago. It is highly likely that the interest rate on your current loan is higher than what the market is currently offering.
In order to capture these low rates as compared to your current rates of 2.00% or even 3.00%, the answer is quite straightforward: consider refinancing your home loan.
You may have questions raining in your mind, starting from “What is difference between refinancing and repricing?”, “Where is the banker whom I spoke to years ago?”, “What’s the best mortgage loan in Singapore?”, “What’s the current refinancing rates?” and many more!
Comparing refinancing home loan packages in Singapore can be quite a tedious task akin to drowning in a sea of information. Let us summarize the key information you need to take note before you start your refinancing journey.
Are you eligible to refinance?
Before diving deeper into the finer details on the interest rates and packages, it is important to check on your eligibility first. Let’s get you reading on the essential information needed.
- Lock-in periods
Most home loan packages often have lock-in periods ranging from 2 to 3 years.
If you are still within the lock-in periods, there is usually a penalty involved if you choose to move your loan elsewhere. Check your letter of offer to determine your exact hostage (lock-in) period and the penalty fee. The penalty is usually about 1.5 – 2 percent of the outstanding loan amount – which is a deterrent to most people.
However, if you are currently on HDB home loan, there is no such restrictions. You can refer to our HDB home loan guide for more details.
- Interest review dates
Interest review dates usually applies 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 deter you from redeeming the loan until the day the loan is supposed to reset.
Hence, it is crucial to find out if there is a specific time and day that you can only take action. Otherwise, you may be subjected to pay for a fee again – typically 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 will want to refinance 3 months prior. The attractive interest rate that you had signed at the beginning could soon be changing and changing very drastically.
It is time to review and 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 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.
- Total Debt Servicing Ratio (TDSR)
Last but not the least, it is time to look at the state of your current finances since you took up the last mortgage. If you had taken up a new car loan or sign-on additional credit cards, it is factored into the calculation of TDSR. The magic formula to calculate TDSR is take your total monthly debt obligations divided by your gross monthly income. You can also use this online calculator .
The good news is that while it can be complicated, it is not rocket science, and there is 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. In fact, you can read more on the 7 myths of home financing.
Where to find the best rates for refinancing?
Now that we had done our eligibility checks, we can move forward to the next step – finding the best rates for refinancing.
Why do we look for best rates and not the cheapest? In this new era, we find ourselves smarter and knowledgeable enough to be aware that cheapest is not necessarily the 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.
This article only has one aim: to equip you with the information you need to make an informed decision as a savvy consumer. There are many ways in getting the information you need – the diligent way or the smart way.
Diligent way – taking time off to visit all 16 banks in Singapore, repeating your requirements 16 times, reviewing the multiple packages provided by each bank, scrutinizing the fine prints to ensure there is no hidden fees, the list goes on.
Or, you can go the smart way – contact a mortgage broker, tell them your requirements once, enjoy a cup of coffee while they do the research, hear their analysis and recommendations. Thereafter, discuss with your spouse/partner and make your decision, continue reading lifestyle news on your mobile phone while the mortgage broker prepares all the necessary for you.
Whichever way you choose to go, here is a brief summary of the key information you need to know before signing on the dotted line again.
Types of Interest Rates
- Fixed Rates
Fixed rate home loan packages are popular because they provide the stability and security to hedge against other financial risks we may carry. The take-up rate is especially high during uncertain economic times. The security that a fixed rate mortgage offers is offset by the higher premiums it commands. Fixed rates mortgages have interest rates that can be fixed for a period of 1 to 5 years.
- SIBOR Rates
The Singapore Inter-Bank Offered Rate, or more commonly known as SIBOR, is an interest rate whereby banks offer to lend unsecured funds to other banks within the Singapore interbank market. While this means greater transparency as SIBOR rates are readily available online, your interest payments can increase or decrease based on SIBOR rates and a review by banks every few months. As SIBOR rates are the same across banks, banks typically differentiate their SIBOR rate loans by having different spreads and incentives.
“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.
- 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. The important takeaway here is that ultimately, they are still determined by their respective institutions.
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.
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 lasts 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.
- Cancellation fees
Should you choose to withdraw before loan disbursement, you may be subjected 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.
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
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 range 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.
What is the difference between Refinancing vs Repricing?
Generally, refinancing and repricing occurs after the lock-in period of the existing loan. It often means seeking more advantageous terms for your mortgage. Refinancing is more cumbersome as it entails comparing offers from various banks, further legal conveyancing work and fees, and tussling with mortgage brokers. For refinancing, the new financial institution will need to assess your financial status do a further valuation of the property.
Repricing is less cumbersome as you simply stick to the current bank but change certain terms of the loan agreement. There are less fees involved but one loses the benefit of comparing offers between banks. One also is not required to go through the whole hassle of a credit assessment.
In Singapore, one has to mindful that the limits imposed by the Total Debt Servicing Ratio (TDSR) framework applies at the point of loan application. Hence, if your TDSR limits has changed subsequent to your 1st loan, any future refinancing or repricing may be affected.
How much you can save by refinancing?
Whether it is refinancing or repricing, the borrower typically saves on interest. The borrower can make use of the opportunity after each lock in period to pay down the loan principle and negotiate a lower interest rate based on market forces. Certain banks provide incentives such as free legal fees when a borrower refinance or reprice his loan.
One can also choose to alter his loan tenure. By altering the loan tenure, one can adopt a longer tenure to lower the monthly instalment or a shorter tenure to settle the loan faster. For example, in the midst of the financial crisis brought about by the COVID-19 pandemic, central banks like the United States’ Federal Reserve have slashed interest rates to boost economic growth.
As our SIBOR rates typically highly corelated with US interest rates, homeowners now have the opportunity to refinance or reprice their mortgages and possibly enjoy lower interest rates. Sometimes, there is no real need to refinance or reprice. It really depends on the interest rate environment. In a rising interest rate environment, it is usually wiser to retain your old mortgage arrangement. 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 on 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.