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Property Refinancing
Foreword
Refinancing mortgages can be tedious and confusing. This article summarises the key information you need to know to get start on refinancing your property.
What is Property Refinancing
When you refinance your mortgage, it means you are switching from your current home loan to another bank's home loan. Usually when people refinance, they are pursuing lower mortgage interest rates so they enjoy some savings in interests, or to get an even higher loan amount so that they can get excess cash.
Refinancing is usually done on or after the 4th year of your mortgage. This is because many mortgage packages would raise their interest rates after 3 years. Therefore, this is when you should see if another bank can offer you a lower interest rate.
Why You Might Consider Refinancing
1. Lower Monthly Installments
In the long run, you could save a significant amount in monthly installments if you understand the refinancing process carefully and take into account the various costs of refinancing such as the legal and valuation charges.
2. Lower Interest Rates
Through property refinancing, you can convert between a fixed interest rate mortgage and a floating interest rate mortgage depending on your circumstances.
Floating rate mortgages fluctuate based on the interest rate it is pegged to either of the following:
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Singapore Interbank Offered Rate (SIBOR)
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Singapore Overnight Rate Average (SORA)
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The bank's fixed deposit interest rates
Fixed rate mortgages usually fix the interest rates for 1 to 5 years. This is preferred during economic uncertainty as it provides stability and helps to hedge against other financial risks.
3. Cash-Out Refinancing (Cash-Out Refi)
Cash-out refi is only an option for private housing and not for a HDB flat. This is when you use your property as collateral in order to take out a loan in cash. You can use this cash to start a business, consolidate debt or to invest. Why this is better than taking a personal loan is that personal loans are typically restricted to only 4 times your monthly income.
With cash-out refi, the amount that you can borrow is usually:
(60 to 80% of the market value of your property) – (Outstanding property loan amount) – (CPF funds used for the property)
Things to Note When Refinancing Your Property
1. Lock-in Period
Lock-in periods refer to the amount of time you would have to keep the mortgage with the bank. This helps you to plan when you should start refinancing your home loan. It is good to plan ahead and start the refinancing process at least 4 months before your current mortgage lock-in period ends. If you were to refinance during your lock-in period, you would have to pay a penalty.
2. Loan Term
You could shorten or extend your loan tenure based on the maximum tenure allowed. If you shorten your loan tenure, you could pay off your loan faster, this would be good if the interest rate is low. On the other hand, if you choose to extend your loan tenure, you can improve your cash flow by lowering your monthly repayments. However, this also means you have to pay more overall.
3. Interest Review Dates
For floating rate mortgages, you have to take note of the rate review date for your loan redemption. This date starts from the day your loan is disbursed, and every monthly, or quarterly or yearly, depending on the reference rate of your loan package. Therefore, to avoid being subjected to a cancellation fee of around 1.5% of the loan, you should redeem your loan on the next available redemption date.
4. Legal and Valuation Fees
Depending on your property type, you would have to pay between $2,000 and $3,000 in legal and valuation fees when you refinance your home loan. However, these fees can be subsidised by the bank. If your loan is more than 500k, the banks can defray the legal fees with subsidies. If you loan is less than 500k, some banks can give some percentage of legal subsidy.
5. Total Debt Servicing Ratio (TDSR)
Your monthly debt cannot exceed 60% of your monthly income. The calculation includes all types of debt: home loan repayments, credit card bills, student loans, car loans, personal loans, etc.
6. Mortgage Servicing Ratio (MSR)
Your monthly home loan repayments cannot exceed 30% of your monthly income.
How to Refinance Your Property
1. Research About Your Current Mortgage
Make sure that you know the important features of your mortgage, including the outstanding loan balance, monthly installments, tenure, fees and charges, lock-in periods, interest rates and early repayment penalties. This would make your refinancing process much easier.
2. Plan Your Refinancing Window
Take note of when your bank will increase your mortgage interest rates and its lock-in period. You should refinance after your lock-in period, otherwise you would be charged a penalty fee. However, do still plan your refinancing process early, at least 4 months before your current mortgage lock-in period ends. This is because you would need to give at least 3 months' notice to your bank before you can refinance.
3. Find the Best Mortgage for Refinancing
Do your due diligence in finding the best mortgage loan interest rate across all banks in Singapore, ensure that you read the fine prints to avoid incurring hidden charges and look out for banks that offer subsidies for legal or valuation fees. Another option would be to engage a mortgage broker to do all the research for you.
4. Engage a Mortgage Lawyer
You should engage a mortgage lawyer to help you with your mortgage refinancing. The mortgage lawyer you choose has to be part of the legal panel of the bank with which you are refinancing your mortgage. Usually the bank offering you the refinance mortgage will send you a list of their preferred lawyers too.
5. Apply for Your New Mortgage
Finally, after deciding on a new mortgage, make sure that you start your application at least 4 months before your current mortgage lock-in period ends, this would factor in the time needed for the application process and the 3-month notice for your current bank.