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Falling interest rates: 3 considerations before refinancing your home loan
2020 has been a challenging year with the Covid-19 global pandemic causing an economic slowdown for most countries, with Singapore being no exception. However, the bearish market has provided a silver lining – lower home loan interest rates.
Boost your savings with lower home loan interest rates
Banks in Singapore have lowered their interest rates on loans that are pegged to the Singapore inter-bank offered rate (SIBOR), a key benchmark rate that many home loans are pegged to, giving home owners the opportunity to secure more favourable rates.
As of the time of writing in July 2020, the one-month SIBOR rate is around 0.25%, while the three-month SIBOR rate is at 0.55%.
This makes refinancing an attractive option as you can switch your home loan to another bank to enjoy a lower interest rate. For example, for a $1 million loan taken over 20 years, a 0.5% reduction in interest rates could mean a savings of about $200 to $240 per month. These savings would be significant, especially during this uncertain economic period.
As such, more home owners may be considering refinancing their mortgages to take advantage of lower interest rates, change the length of their loan or swap an adjustable-rate mortgage for one with a fixed rate.
However, before you jump into refinancing your home loan, here are 3 things to consider:
1. Timing and lock-in periods
Most bank loans will require you to serve a 3 to 6 months’ notice before you can terminate or make changed to the loan. As such, the best time to start looking for a refinancing is around 4 to 6 months before the end of the lock-in period of your existing mortgage.
Planning when to refinance your loan can help ensure a smoother transition from your existing loan rates to the refinanced new loan rates.
This ensures that enough time is given to serve the letter of notice from your existing bank and for the new bank to process your refinancing application.
2. Possible penalties of your existing home loan
Refinancing during the lock-in period will incur a penalty, usually about 1% of outstanding loan amount, which might negate any cost-savings.
Another possible penalty is a clawback of subsidies granted for any legal charges during loan application (charges range anywhere between $1,800 to $3,000).
3. Costs associated with refinancing
Refinancing involves a new bank having to go through the paperwork, similar to getting a home loan for the first time. There is a conveyancing fee of around $2000 to $3000, depending on the panel of law firms appointed by the bank.
In addition, valuation fees range from $350 to $1000, depending on the size/value of your property and is paid to a professional to assess your property’s market value. However, these fees may be subsidised or even fully absorbed by the bank that you are refinancing with.
Another point to consider is your plans for your property. If you intend to sell within the next few years, watch out for any penalties associated with sale of property in your new loan package, especially during the lock-in period.
Repricing: an alternative
Repricing is an alternative option to refinancing. It is when you stay with the same bank but change to a new loan package they offer you.
While the rates for repricing are usually not as attractive as those for refinancing since you are limited to only one bank, the benefit is that you save on costs.
Instead of legal fees, you only pay for an administrative charge (from $200 to $800) and the processing and paperwork are much simpler. Typically, the repricing applications take about one month to process, much shorter than the usual three months for refinancing.
In short, repricing refers to changing your existing home loan package to a new one with your current bank, while refinancing refers to changing your existing home loan package to a new one with a different bank.
If your existing home loan is nearing the end of the lock-in or clawback periods and you will not incur cancellation charges or penalties, you should consider refinancing your home loan.
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