Probably one of the biggest financial decisions that you take in your life is buying a home. Moreover, if you do so through a home loan, paying for that loan is a long term financial obligation. The financial disorder sparked by the Coronavirus has halved the home loan growth rate this year, but there is still one upside for homeowners: low mortgage rates.
Refinancing in the midst of a pandemic can be an enticing option for homeowners to switch banks for lower interest rates. It can help increase your monthly cash flow and save you money in due course.
Under the current circumstances, refinancing your home loan may be due to a reduction in income, loss of a job, medical emergency, loan debt or mortgage problems. If you have a loan that’s too risky to continue to make payments on, you can refinance it into a better loan.
So, When Should You Refinance Bank Home Loans?
- Refinancing is when you move your home loan to a different bank to get a lower interest rate based on market conditions and your credit score. To find out if you are eligible to refinance, you need to meet the Total Debt Servicing Ratio (TDSR) requirements. Your credit value may have improved or deteriorated while you were locked into your initial bank home loan.
- Once you know you are eligible to refinance your bank home loan, you can shop for the best home loan packages through our Refinance Comparison Tool.
- In uncertain scenarios like this one, choose floating rates, as the interest rates are lower and more competitive. Fixed rates are a good option for when interest rates are rising.
- Consider refinancing current home loans when SIBOR and SOR rates (determine the interest rates on some home loans) undergo fluctuation. The Monetary Authority of Singapore (MAS) and The Association of Banks Singapore (ABS) monitor these SIBOR and SOR rates and make adjustments to inter-bank lending rates daily.
- Other variables such as property tax and management fees vis-a-vis your new monthly loan installment, old versus new loan tenure, personal income, and any other existing loans; need to be taken into consideration before refinancing an existing loan.
Use PropertyGuru’s home loan refinancing calculator to estimate how much you could save by refinancing.
Pros of Refinancing Mortgage:
Lower Interest Rates
Change Loan Type
Change Loan Term
Lower interest rates typically result in lower interest costs and significant savings over the life of the loan, especially with large or long-term loans.
Those who opt for a fixed interest rate may find it easier to allocate a budget towards the monthly instalments since rates are stable. However, if your financial conditions have changed and if the interests rate remains low for a certain period of time, monthly payments can decrease with floating rate packages.
There are 3 different types of floating rates in Singapore: Board rates, SIBOR-pegged floating rates, and fixed deposit rates. If you’d like to find out how current SIBOR levels are affecting your monthly loan payments, use our handy Mortgage Repayment Calculator.
You can extend your loan repayment to increase the term of the loan (but potentially pay more in interest costs, if your current loan payout is unsustainable).
You can refinance into a shorter-term loan and pay higher monthly instalments for a lower interest rate to repay your loan faster.
Whether you lower the interest rate on your loan or extend the amount of time you’ll take to repay it, the outcome is often a healthier monthly cash flow and more money available in your budget for other essential monthly expenses.
Cons of Refinancing Mortgage:
Higher Interest Cost
Refinancing comes with additional costs such as legal and valuation fees, which can add up to S$3,000. These costs are usually subsidised by the bank. However, if your bank won’t cover these refinancing costs, you’ll need to pay for them upfront. Use our ultimate refinance checklist to save time, money and make smarter property decisions.
Refinancing can backfire. When you stretch out loan payments over an extended period, you pay more interest on your debt. You might enjoy lower monthly payments, but that benefit may be offset by the higher lifetime cost of borrowing.
Without calculating how long it will take for the savings from refinancing to exceed the associated costs if you refinance your existing loan (which many homeowners fail to consider), it could take a long time to recover the costs, and you may not be prepared to live in the property long enough to reap the savings.
Thus, refinancing your mortgage during uncertain times allows you the flexibility to secure more favourable interest rates or to replace an unsustainable home loan with the one you can live with, in the long run.
Either way, it’s important to be informed and weigh your savings and costs against the pitfalls to allow you to make a calculated decision, when the time is right for you.
At PropertyGuru Finance, we provide complimentary home loan reviews to ease the financial burden for a homeowner in their monthly repayments.