wealtharticles-5_things_to_take_note_before_you_refinance_your_home

5 Things to take note before you refinance your home loan

With interest rates in Singapore still falling and the property market turning quiet, banks are now gunning for the mortgage refinancing business.

Refinancing means replacing your current mortgage with another that comes with lower interest rates. This can be done with the same bank or by switching to another bank.

Many home owners are now considering this because the Singapore Inter-Bank Offered Rate (Sibor) has fallen from over 3% to below 1.3%. Sibor, the rate at which banks lend to one another, is a key component used in setting home loan rates.

Some home owners have taken the bait. But before you take the plunge, you should be aware that refinancing a mortgage comes at a cost. Penalties could be imposed if you terminate your housing loan early with your existing lender, and you could incur legal fees if you refinance the loan with another bank.

Mr Dennis Ng, the founder of mortgage consultancy portal www.housingloansg.com, reckons that if you are paying 3.5% or higher on your home loan, you should be able to enjoy savings in interest by refinancing the loan. He worked out that, based on a 30-year loan tenure, refinancing an outstanding loan amount of $215,000 to a lower interest rate of 2.2%, down from the current 4.5%, would result in interest savings of about $14,730 over three years.

1. When you should consider refinancing
Scenario 1
The savings outweigh the costs of refinancing. In other words, do your sums first.
Scenario 2
You do not plan to sell your property within the next 12 months.

It does not make sense to refinance if you plan to sell your home in the short term. Home owners have to pay redemption fees, and even refund legal subsidies or cashbacks to the bank. At times you typically need to give 3 months' notice to your existing bank before switching. If you sell your property within nine months, you will enjoy interest savings for only 6 months. Your savings might not be much higher than the refinancing costs.

2. What refinancing will cost you
With the same bank
Within the lock-in period, check if your package has a lock-in period. During this time, usually 2 to 3 years, you have to pay a penalty if you withdraw your loan. It is usually between 1 to 1.5% of the outstanding loan amount. There is also a conversion fe of between $500 to $1,000.

Outside the lock-in period. The cost is just the conversion fee.

With another bank
With banks pulling out all the stops to garner a larger slice of the home loans market, it is worth your while to shop around. DBS Bank for example, has customised packages that subsidise penalty payments, while Standard Chartered Bank is repricing home loans down for existing customers on selected packages.

OCBC Bank encourages customers to talk to their lenders first before leaving for another bank. This is because the actual charges incurred could vary depending on various factors, which could include the time till the lock-in period expires and the customer's business relationship with the bank.

Within the lock-in period
Besides having to cough up a penalty for early loan redemption, you will have to refund the subsidy on legal costs provided by your current bank. Capped at $2,000, the subsidy is calculated based on 0.4% of the loan amount, plus the cost of the $500 stamp duty. Most banks will offer a subsidy of upto $2,000, depending on the loan amount. If your loan amount is, say, $500,000, the bank is likely to have given you a subsidy of $2,000.

Outside the lock-in period
Normally, you don't need to pay your current bank penalties or administrative fees. However you might have to reimburse the bank for freebies you received when you first took out a loan. These could include legal subsidies, free fire insurance on the property and promotional shopping vouchers

Whether you are inside or outside the lock-in period, refinancing a home loan with another bank means incurring legal fees again.

3. Which home loans benefit you most
There are more than 113 different home loan packages in the market.

Fixed rates
Depending on your "risk tolerance", you can consider locking in your loan at the current low interest rates for the next 2 to 3 years. This means going for fixed-rate loan packages in which the rates are fixed for the first 2 to 3 years.

Pegged rates
If price transparency is a must and you believe interest rates are likely to remain low in the next 12 months, you can consider packages with rates pegged to the Singapore Inter-Bank Offered Rates (Sibor) or other benchmark rates as you will automatically enjoy lower loan rates when interest rates fall further.

Zero penalty for switching
Those who are thinking of selling their property in the next 2 to 3 years should choose a package with a shorter penalty period or one with no penalties attached. For a loan amount of $500,000, you would save $7,500 if you chose a package with no penalties attached over one that imposes a penalty charged at 1.5% of the loan amount.

4. Which expenses you have to budget for
Rates do not stay depressed forever. When refinancing, do not underestimate other expenses in a lower interest rate environment only to find yourself unable to pay your debts and monthly instalments when rates rise later. Borrowers should ensure they are not over-exposed to debt repayments. Set aside enough cash to cover at least 6 to 12 months of all necessary expenses such as utilities and phone bills.

5. Which packages offer favourable incentives
There are more than rates to consider when refinancing.

Partial loan repayment
Pick a package that does not penalise you for partial repayments. This means you can lower your overall loan balance whenever you wish to redeem part of your loan.

Free loan conversion
If your property is still under construction, ask for a package with a "free loan conversion". This lets you switch to a package with lower rates when you get your temporary occupation permit.

Rebates
If a package offers a cash rebate, check if it is refundable and if there will be any additional penalty charges should you withdraw within the lock-in period.

Free fire insurance
Some lenders throw this in.

By, Lorna Tan, The Sunday Times, 20 April 2008

	Current Interest Payment ($)	New interest payment ($)	Annual Interest Savings ($)
Year 1	9,646.69	4,694.48	4,952.21
Year 2	9,496.71	4,583.37	4,913.34
Year 3	9,332.44	4,467.51	4,864.93