What You Should Know About Refinancing Your Mortgage In Singapore

In any economic climate, it can be difficult to make the payments on a property or home mortgage. Between possible high interest rates and an unstable economy, making mortgage payments may become tougher than you ever expected. Should you find yourself in this situation, it might be time to consider refinancing. The danger in refinancing lies in ignorance. Without the right knowledge it can actually hurt you to refinance, increasing your interest rate rather than lowering it. 

Refinance is a fancy term to describe getting a new mortgage to replace the original loan. Refinancing is done to allow a borrower to obtain a better interest term and rate. The first loan is paid off, allowing the second loan to be created, instead of simply making a new mortgage and throwing out the original mortgage. For borrowers with a perfect credit history, refinancing can be a good way to convert a variable loan rate to a fixed, and obtain a lower interest rate. Borrowers with less than perfect, or even bad credit, or too much debt, refinancing can be risky especially when buying a Geylang property is mentioned. Below are some tips to ensure you are equipped with the necessary information to decide whether you should refinance your property.

1. Find the best interest rate package

For example, if you’re currently paying an interest of 4.50%, you should seek a loan package which is offering lower than this amount. This means a lower interest rate if you’re looking to lower the interest cost on your housing loan. Some banks are offering up to 3 to 5 packages for a mortgage loan which can be seen as confusing to a layman. Some banks impose terms such as lock in periods, extra charges on top of loan amount to cover the paperwork or more. Do understand the changes that would apply if you opt to refinance your property from another bank to ensure that you do not feel cheated or mislead by the hidden terms and conditions. Do compare and contrast when you scouting around for banks’ refinance options for loans.

2. The cost of refinancing a mortgage

Refinance a mortgage would definitely involve fees such as legal and valuation fees. Most housing loan packages offered by banks come with a legal subsidy. This is typically 0.20% to 0.40% of the outstanding loan amount. The property owners would also need to appoint a law firm to act on their behalf for the refinancing process. The lawyers would then proceed to prepare legal documentations such as new mortgage documentations for the both the homeowners and banks to execute. If homeowners are using their CPF to pay for their monthly installments, the lawyers would need to notify the CPF board of the changes as well. Finally, in order to refinance the mortgage, homeowners would need to pay stamp duty to IRAS. 

As mentioned above, terms such as lock in agreements from mortgage are rather common on today’s era. For simplicity sake, lock in term of a mortgage loan is the period where settling the mortgage within the said period would result in a penalty. Homeowners should take into consideration whether the process would be worth the hassle and money after incurring such penalties if the mortgage is settled earlier. If the difference is huge, for example, the current interest of 4.50% being offered by Bank A could be refinanced to 3.80% by Bank B, it might be worth to incur such penalties. Fun fact, if you are getting a Geylang property, there will be additional loading fee charged, up to 0.25 percent.

3. Early settlement / termination penalty.

Most housing loans come with a lock-in period of zero, one, two or three years. During this period, should homeowners perform a partial or full redemption, there will be a penalty charge, usually about 1.50% of the redeemed loan amount. Of course, with zero/no lock-in period package, they can redeem their loan anytime without any penalty fee. It is important to consider whether it is worth incurring the penalty to refinance the property or to wait out for the expiry of the lock in period before refinancing it.

4. Total Service Debt Ratio (TSDR)

The recent framework that government has fine-tuned is the Total Service Debt Ratio (TSDR). Now, it has apply to refinancing property loan for more flexibility to borrowers in managing their debt obligations. The framework kicked in due to response feedback from borrowers who are unable to refinance their existing property loans owing to the TSDR’s application with a threshold of 60 percent. However, if the owner bought the property for own stay and before the ruling date kicks in, which is 1st September 2016, they will be exempted from the TSDR framework when he/she refinance the housing loan. To understand better TSDR refinancing framework, click here. 

There are more than just the 4 highlighted factors mentioned above when it comes to refinancing your mortgage loan. Ultimately, the decision should be yours to make after considering few of the factors mentioned above. Homeowners should make the best decision tailored to their circumstances instead of taking a blanket approach to adopt when it comes to refinancing.