This post is part of a series of posts on refinancing by MoneyIQ, a free Singapore home loan comparison site with mortgage broking services.
Typically a housing loan interest rate would be low during the first few years, subsequently the rates would increase. Refinancing enables you to lower the interest rates on your housing loan. Also, refinancing allows you to take advantage of more flexible packages that will suit your changing lifestyle and investment objectives. While there are costs involved, you could still end up saving a considerable amount over the entire loan tenure.
Refinancing is when you switch to a new home loan with your existing bank or a different lender.
1. Rate and Term Refinancing
For most people, the primary reason for refinancing is to reduce the monthly installment, pay off the loan faster or reduce the interest.
i) To get a better interest rate
If interest rate has fallen since you took up your loan, then refinancing generally allows you to reduce your monthly installments.
ii) To switch from a floating loan to a fixed rate loan
If your interest has gone up and you are worried that the trend will continue, then changing to a fixed rate will prevent you from being hit by increasing monthly installment.
iii) To obtain better loan features
Perhaps your income has improved since you took up the mortgage, and you like to have a loan package that gives you the flexibility to pay off your loan faster. For example, if you have been paying $1,818 on a $300,000 loan at 4 percent for 20 years, you can shorten the tenure to 15 years by paying $2,220 a month.
iv) To reduce monthly repayment
Perhaps you are having temporary difficulties to pay your monthly installment, you may consider refinancing your loan to a longer tenure. For example, assume you have a $300,000 mortgage at 4 percent for 20 years and have been paying $2,121 a month. Refinancing to a new 25 years loan at the same rate would lower your monthly payment to $1,848.
Keep in mind that the longer the tenure, the more you will pay in interest over the entire loan tenure.
2. Taking Equity Out From Your Home
You can unlock part of the equity you have built in your property without having to sell it. By refinancing and taking an equity loan against your property, you can use the cash to pay off a major expense or consolidate your debts.
(Note that the Housing and Development Act does not allow HDB flat owners to take equity out from their HDB flats. In additional, CPF cannot be used to service the monthly installment on your equity loan.)
i) To consolidate your debts
The interest rate on a mortgage is usually lower than that of a credit card debt or unsecured line of credit. Use the equity loan to pay off these high interest debts and manage your debts under one account.
ii) To fund major expenses
Your equity loan can be considered to fund major expense like home improvements and children’s education. The equity loan can also stand by as ready cash for emergency.
Here’s an example: Let’s say you still owe $150,000 on a $250,000 house, and you want a lower interest rate. You also want $50,000 cash, maybe to spend on your child’s overseas education. You can refinance the mortgage for $200,000.
What Are The Costs?
i) Early Redemption Penalty
This refers to the penalty payable to your existing lender if you refinance to another lender within the lock in or commitment period. Typically the penalty is set at a predetermined rate peg to your housing loan. Some lenders will also have an administration fees.
ii) Legal Clawback
If you had received a legal subsidy from your existing lender when you first took up the loan, you may need to pay back the legal subsidy should you refinance within the legal clawback period.
If you are thinking of buying a new home or refinancing your current mortgage, head over to MoneyIQ to see for free what loan packages are available, how much you could potentially save on interest costs, and if any cash rewards are available.