Refinancing in Singapore

Refinancing in Singapore

Before applying any home loans, you may need to use home loan calculator to estimate your monthly house loan repayments. If your home loan is currently charging you more than 2.4% interest, you might be paying more than you need to, and should definitely consider refinancing. Refinancing your home loan in Singapore means reducing your monthly repayment amount by switching to a lower interest rate. This could mean switching to a new loan package within your current bank, or switching bank altogether. Here’s what you should know about refinancing in Singapore.

1. What is refinancing?

Refinancing a home loan is a chance for homeowners to switch their home loan to another bank for a lower interest rate. This can help you save money in the long run. Refinancing is usually done after 4th year of your home loan or after. That is because typical home loan packages raise their interest rates after 3 years, after which the interest rate is likely to rise. Therefore, this is the best time to see if another bank can offer you a lower interest rate. Another reason homeowner in Singapore consider refinancing their current home loans is due to changes in SIBOR and SOR rates which determine the interest rates on some home loans. SIBOR and SOR could be on their way up due to global economic changes, so if an increase is predicted, you will want to switch to a lower interest rate loan too. The Monetary Authority of Singapore (MAS) and The Association of Banks Singapore (ABS) monitor these SIBOR and SOR rates and make adjustments to interbank lending rates daily.

2. When should you start looking to refinance your loan?

While you can technically refinance at any time, you should always wait until your lock-in period is over before you start looking to refinance your loan. If you try to do it during the lock-in period, you will usually be charged a penalty fee, typically about 1.5% of your outstanding loan amount. There is no need to wait until the lock-in period is over before you begin the process of refinancing, though. Newly-signed refinancing contracts are valid for 6 months, so in a rising interest rate environment, you will want to get a good home loan package as early as possible. You would also need to give at least 3 months’ notice before you can refinance.

Typically, bank loans have a lock-in period of 2 or 3 years. You will want to take note of the date on which your current bank will increase your home loan interest rates, and work backwards from there. Based on the timeline above, starting your process of refinancing applications should begin about 4 months or so before the date of the increase. This factors in the 3-month notice period you need to serve with the current bank and also application time with the new bank you wish to move to. Lock-in periods are the norm, but if you are really lucky, you might be one of those people who signed up for a home loan package with no lock-in. This can happen if you signed your home loan during a price war between the banks.

3. What is the cost of refinancing?

We have already mentioned the various costs of refinancing such as legal fees, valuation fees, prepayment penalties during the lock-in period. However, some of these costs can be funded by the bank under some circumstances. For example, if your loan amount is big enough, banks will be willing to cover the legal fees with subsidies. They usually do this for outstanding loan amounts above $500,000. While everyone loves a good freebie, do think carefully about taking on such legal subsidies as they will often come with terms and conditions or restrictions. Mostly, these stipulate a certain duration known as the “clawback period”, which is the time you need to stay with the bank before you can refinance to another bank without a penalty fee. In other words, this is a new lock-in period for your new home loan. If you do not stick with this bank for the duration of it, the bank will claw back the freebies they gave you.

Another cost of refinancing is known as the cancellation fee. This is incurred if you refinance a home loan package when the property is still uncompleted. For buildings under construction, the home loan amount is disbursed in stages. The cancellation fee amount is around 1.5% of the loan amount that has not been disbursed yet.

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