Refinancing is the process of switching your existing home loan package to a new one with another bank. People refinance all the time to take advantage of better interest rates, to manage their cashflow (by lowering their monthly repayments), or to change their mortgage type (for example, from a floating rate to a fixed rate package). If you choose to switch your home loan package to a new loan within the same bank, the process is called repricing.
In Singapore, most home loan packages are structured in a similar way: interest rates for the first 3 years are attractively low, followed by a substantial jump on 4th year onwards. This structure means that it usually makes financial sense for property owners to refinance every few years.
If you’ve not done a refinancing before, this step-by-step guide will take you through the process and highlight things you need to take note of.
Step 1: Are You Eligible To Perform Refinancing?
The first step of the refinancing process is to check if you are even eligible to refinance your mortgage. Rules like TDSR and your credit score could disqualify you, and the terms of your current home loan package might make it unfeasible to perform refinancing at this point in time. Here is a checklist of things you can use to self-assess.
When performing refinancing, you need to be within limits imposed by the Total Debt Servicing Ratio (TDSR) framework. TDSR limits do not apply to mortgages where you are living in the house, but will apply to loans taken on an investment property.
If you took out a new car loan or other forms of financing recently, you might have pushed yourself above the TDSR threshold that stipulates your monthly repayments should not exceed 55% of your gross monthly income.
As with all forms of financing, you will need to have an acceptable credit score before banks will be willing to lend money to you. Your credit score takes time to repair, so when you are considering doing refinancing, check your credit score and take steps to rectify it if there are any problems.
Most home loan packages will come with a lock-in period of 2 or 3 years. You will be levied with a hefty fee (of around 1.5 percent of the outstanding loan amount) if you move your loan elsewhere before the lock-in period expires. Check the terms of your loan to be sure. This often includes terms surrounding partial and full redemption. If you sell your home within this lock-in period, you may also have to pay a fee (or a reduced fee).
When you sign up for a new loan, banks typically threw in enticing perks like subsidies for legal and valuation fees. These perks come with clawback periods of around 3 years. If you attempt to refinance during this period, you will need to repay these subsidies, which typically amount to between $2,000 to $3,000.
Interest Rate Reset Dates
Some banks may specify that you must serve notice of your intention to redeem your SIBOR/SOR-linked mortgage and do a refinancing on interest rate reset dates. What this means is that if you do not serve notice of your desire to refinance on the reset date, then you will have to wait another 1 or 3 months (depending on the SIBOR/SOR duration of your loan).
Step 2: Shop For Quotes
Since the refinancing process can take up to 6 months to complete, you can begin doing research and shopping for quotes about 6 months before your lock-in period/clawback period expires or before higher interest rates take effect on the 4th year of your mortgage.
This allows you ample time to compare packages, and serve the requisite notice (usually 3 months) to your existing bank, as well as fix any issues with your credit score.
In addition to the interest rates offered, you also need to decide what kind of mortgage to get.
Fixed Rates mortgages have the most stability when it comes to interest rates, allowing you to have sight of rates for up to 5 years or so, before the rates are up for review by the bank.
SIBOR/SORA-pegged mortgages are based on SIBOR (Singapore InterBank Offered Rate) or SORA (Singapore Overnight Rate Average). These are interest rates used by banks in Singapore when they borrow from one another. The previous benchmark rate, SOR (Singapore Dollar Swap Offered Rate) has been replaced by SORA as it was more volatile and affected by US Dollar fluctuation. Different packages have different durations when the floating rates change, such as 1 or 3 months, or up to 12 months.
Board Rates are rates set by the bank and can be changed at their discretion, usually after giving 30 days’ notice. These rates always look quite attractive, but you will be at the mercy of the bank if they revise the rates drastically. In comparison, SIBOR/SOR-pegged packages have more price transparency.
Fixed Deposit-pegged packages are based on current fixed deposit rates offered by the banks, in denominations of 18, 36, or 48 months. These are somewhat more transparent than Board Rate packages, but are still fully in your bank’s control.
As you shop for the most suitable loan package, don’t forget to ask about signing bonuses, like subsidies for your legal and valuation fees, and waivers for admin costs.
Step 3: Sign With A Broker
Once you’ve identified the broker you want to work with and confirmed the home loan package you want to sign, get ready your documents because brokers are known to work very fast.
Documents Required: NRIC (or passport for foreigners), latest income tax Notice Of Assessment, latest 3 months payslip, last 15 months’ CPF Contribution History, as well as latest monthly statements for credit cards, overdrafts, and other instalment payable loans.
Your broker will help you through the paperwork and link up with the bank. Get periodic updates on the progress, since it will be a multi-month process before your new home loan package is in force.
Need Help With Refinancing?
Refinancing is a powerful tool to help you manage your mortgage. But it can also be scary since it impacts hundreds of thousands of dollars over many years. Having a good, trusted broker like our friends at RedBrick can give you peace of mind, knowing that you will always get the best rates out there and enjoy unparalleled service.
The best part? The service is free for you, since brokers like them receive their commissions from the banks. If you’re considering doing a refinancing, feel free to get a non-obligatory quote and consultation.
Simply fill in the contact form and an experienced Redbrick mortgage specialist will be in touch with you for a non-obligatory consultation. The best part? Their services are free for you, since its the banks that are footing the bill.
This article was originally published on 21 June 2018 and updated to reflect the latest changes to SOR and SORA.