Despite the government’s best efforts to cushion the blow, COVID-19 has resulted in leaner times for many Singaporeans. Never before have our expenses come under this amount of scrutiny, as we look for ways to reduce our spending.
One part of your budget that deserves special attention is your housing loan repayments. For homeowners, this is likely to be a significant monthly expense.
While it is possible to defer your mortgage obligations, for the time being, this is not an ideal solution as it might mean larger repayments in the future.
A viable alternative is to refinance your housing loan, which allows you to potentially reduce your monthly expenses. Intrigued? Here is a step-by-step walkthrough of the refinancing process in Singapore.
Refinancing simply means switching your existing home loan (even if it’s an HDB loan) for another cheaper provider’s loan package.
That’s right: housing loans are not for life. You can actually shop around for a better one.
Now is a particularly good time to refinance. Due to economic forces, banks currently have very low-interest rates.
Let’s say your current housing loan with Bank A is at 2.5% per annum, but you found a great new loan package at 1.5% from Bank B. (1% savings is a big deal, considering how much homes cost in Singapore!)
When you refinance your home loan, Bank B repays your outstanding loan to Bank A. You then continue your monthly loan repayments with Bank B, but now you can save perhaps a few hundred dollars a month.
Step 1: Assess your current housing loan
Step 2: Find available mortgage loans that suit your need
Step 3: Decide between floating or fixed rates
Step 4: Check the repricing options
Step 5: Refinance and save!
Regardless of whether you have an HDB loan or a bank housing loan, it is possible to refinance to a bank loan.
But first, you need to know what your current home loan package is. Find out what the interest rate is, as well as the loan tenure and monthly repayment amount. Now you know what to use as a benchmark when refinancing.
You should also check if you are eligible to refinance. If your housing loan is a bank loan, you just need to check if your original lock-in period is over. Otherwise, you’ll have to pay a penalty — not worth it.
If you are currently repaying an HDB loan, there is no lock-in period, but you need to look at how much you’ve paid thus far.
HDB allows you to borrow 90% of your home value, whereas banks only allow 75%. So if you want to switch, make sure you’ve already repaid (or have enough cash/CPF savings for) at least 25% of your current home value.
You can use GoBear’s handy home loan comparison tool to check out the housing loan packages with our bank partners. Luckily, the laborious task of checking all the banks’ loan packages can be outsourced!
Your mortgage specialist will not only get interest rates from familiar providers like DBS and OCBC home loans but perhaps also non-local banks. These more obscure banks usually offer lower mortgage rates and more attractive packages, so they are well worth considering.
Apart from shortlisting the best home loan packages for you, your mortgage specialist will also advise on any legal and financial requirements needed.
For example, if you want to refinance your HDB loan to a bank loan, a good mortgage specialist will advise on how much more (if any) you need to top up with cash or CPF.
Oh yes, when you’re on the market for a new home loan, you’ll eventually need to decide between a fixed-rate housing loan package vs a floating rate one.
Fixed-rate packages are simple to understand. The 2.6% HDB loan is a fixed rate home loan. If you see a bank’s “1.5% 2-year package”, that’s also a fixed rate. Your repayments will be the same every month.
Note that for bank loans, fixed mortgage rates are not valid forever. Instead, they are only valid for a stipulated lock-in period — usually 2 or 3 years, but can be up to 5 years.
Floating rate home loans, on the other hand, are more complicated. Most of these are pegged to what’s known as the SIBOR rate, which is an inter-bank “market rate”.
SIBOR goes up and down with economic fluctuations — it is low right now, but it can rise again. If you want to fully take advantage of the low-interest rates right now, a SIBOR-pegged floating rate is a way to go. However, this also means your monthly repayments may vary rather drastically.
For newcomers, we recommend going with a fixed rate home loan, which may be a little more expensive overall, but is easier to budget around.
Once you know what sort of housing loan packages are out there, this is the time to go back to your current bank provider and see if they can offer you anything better.
This is known as repricing. Repricing is like refinancing, except you stay with the same bank. They’ll just switch you to a new loan package. You should know what packages are available out there before agreeing to reprice.
Generally, repricing saves you less money than refinancing outright. However, the process is a lot quicker and simpler because there is less legal paperwork. You may need to pay an admin fee to complete the repricing process.
Overall, it may be worthwhile to reprice if the savings from refinancing are not worth the hassle. This is usually the case for smaller loan amounts.
You’ve considered the options, crunched the numbers, and have finally decided to refinance your housing loan. Now, go ahead and apply for the new loan package.
The actual refinancing process will take about three months, so don’t expect immediate savings from next month onwards.
This process includes a valuation of your home (typically a $350 to $1000 fee) as well as legal paperwork (conveyancing fees of $2000 to $3000). These costs are usually paid or subsidized by the new bank in order to gain your business.
Once the new bank has done its due diligence and you have “ported over”, you can relax for the next couple of years until your lock-in period expires.
The refinancing process is cyclical. Once your lock-in expires and your current mortgage rate starts creeping up, it’s time to keep an eye open for a better package. The next time round, though, you’ll have the procedure down pat. Otherwise, come back to this step by step guide!
This article was first published on GoBear Singapore blog.
