The Ultimate GoBear Guide to Refinancing Home Loan
When the housewarming festivities and the novelty of owning your first home die down, you have to start making another big decision: to refinance, or not to refinance?
Since the start of September 2016, Monetary Authority of Singapore (MAS) removed the 60% Total Debt Servicing Ratio (TDSR) limit for existing home owners who griped that it has become difficult to finance their home loans. If you find yourself belonging to the group that has to deal with a pay cut or increased liabilities, all the more it makes sense to refinance your home loan.
Otherwise, there is still interest savings to be reaped through refinancing. Don’t be fooled by the relatively low-interest figures (compared to, say, car loans or education loans); as it is slapped on a sizeable amount, a 0.1% difference could be enough to make you rue the day you didn’t compare the best home loan packages around.
There is more to home loans than just fixed and variable rates. Read on to pick up the ins and outs of the process and how you can milk this particular debt for what it is worth.
Minimise Interest Payments
Interest rates are a pain in the behind that makes things costlier than it should be. The longer it drags out, the more painful the slow death. So in the interest of your financial well-being, you should consider refinancing your mortgage to compress this extra burden. You don’t want the liability (mortgage) to weigh down the asset (your home).
The interest rate is pegged to SIBOR, an interbank lending rate that fluctuates with time. But the final interest rate you are paying includes the bank spread (e.g. 0.7%). If the three-month SIBOR is 0.87%, you are charged 1.57% on your home loan package.
The ideal time for you to refinance is when you are approaching the tail end of your lock-in period, which is usually about three years. By the tail end, we don’t mean the last day of the lock-in. In fact, you should be pulling the trigger four to seven months before so you don’t have to pay for not serving the three-month notice.
For borrowers who have better things to do than to keep tabs on the interest rates, fixed rate home loan packages would be better off. In the event of interest rate hikes, it cushions against the changes for the duration of the lock-in before it switches to floating rate.
On the contrary, variable rate packages would suit short-term home buyers and optimistic investors who are looking to ride out the low-interest rate environment.
Confessions of A Home Loan shopaholic
The grass is greener on the other side, right? Sometimes it pays to be a loyal customer to the current bank, sometimes it doesn’t. You won’t know until you start doing what we live for: compare what other banks have to offer.
Each bank has its own special home loan carrots to dangle. For example, OCBC has four customised home loan packages to cater to various profiles – from fixed and floating types to the hybrid in between. DBS’s home loan guarantee borrowers a more competitive rate than HDB’s Concessionary Loan. HSBC’s SmartMortgage gets savvy by offsetting payable mortgage interests with the interest earnings on your current account.
Before you jump ship, there’s one more piece of homework: calculate whether interest savings on your new home loan can pay off the legal fees (typically between S$2,000 and S$3,000) fast enough. Not all banks offer the privilege of absorbing it. Continue shopping at other banks if your calculations reveal that it is not that worthwhile.
Longer Loan Tenures, Higher Opportunity Costs
The maximum loan tenure for HDB and private properties are at 25 and 30 years respectively. But why spread it out across such lengths of eternity? We’re talking debts here, so it’s perfectly all right to finish fast.
By reducing your tenure (yes, you could be servicing higher monthly repayments, but stay with us) and paying off mortgage in lesser time, you can finally free yourself from the binding liability and jump into your second property.
You might be jumping into yet another liability, but it doesn’t have to be after you lease it out to tenants to cover the mortgage for you. It is also easier to secure the max home loan quantum for that second property without being restricted by a lower loan-to-value (LTV) ratio.
Now that the TDSR limit has been lifted…
You can capitalise on low interest rates and refinance. Before the new ruling took effect early in September, existing home loan borrowers were restricted to TDSR of 60%.
If your gross monthly income is S$3,500, you couldn’t be spending more than S$2,100 on your total debts. With student, car and personal loans to worry about, it further drives down the maximum amount you can service the mortgage per month and that made refinancing more difficult than it should be.
If you want to diminish your home loan faster, you would have to clear off one of your other debts at once so your credit report is a little more ‘cleaned up’.
This new TDSR change also affects the investors. They are also exempted from the 60% limit provided that they clear the following two conditions: a) commit to repaying at least 3% of the outstanding balance over three years, b) fulfil the bank’s credit assessment.
However, if you are taking up a new home loan, the TDSR limit still applies as MAS made it clear that this move is not an easing of property cooling measures.
No matter what, this could be a good window of opportunity for both home owners and property investors to refinance. Three years after implementing the TDSR restriction as part of the cooling measures, it has been opened up again now. Who’s to say that MAS won’t rescind the concession down the road?