Refinancing is a great way to save the costs of repayment over the life of your mortgage. With an endless possibility of an interest rate rise, most Singaporean home loan buyers will go for refinancing. But before making this decision, there are a few factors borrowers must consider.

While it is true that refinancing is a way to reduce the overall costs of a loan, many people commit common mistakes when shifting to a new banker.

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If you think you are ready to refinance your home loan, try to avoid these mistakes.

1. Selling after refinancing before materializing any benefit out of it

If you think refinancing is free, then you are wrong. You have to pay a conveyancing fee of around $2,500 to $3,000 while switching your banker for refinancing. In addition, some banks may also charge you other fees as well. For example, they may ask you to pay $500 in addition to a valuation.

Now if you are looking to sell your house, you want to ensure all the cost of refinancing is recovered along with some extra benefit. Let’s assume you have a home loan of $1.125 million at a 2% interest rate applicable on it. Your monthly interest comes out to $4,158. If this loan is refinanced at a 1.7% of interest rate then you are paying only $3,991 per month. With a refinancing, you manage to save $167 per month. But there is so much more beyond just this. Assume you have to pay $2,500 as a refinancing cost. It will take you about 15 months to break even. The real savings start only after that.

So if you are intending to sell your house within 24 months of refinancing, your actual savings will be $167 X 9 = $1,503 and nothing more than that. It’s you who has to decide whether it’s worth the cost of the process involved in refinancing. Selling your house in less than 15 months is a poor choice that you should definitely avoid.

2. Opting for a more expensive package of refinancing

SIBOR loans usually have lower interest rates in the first three years of the loan and a slight high thereafter. You may think that you can always refinance in the fourth year or later. But let’s assume currently your loan has a ‘fourth year and thereafter’ rate of about 2.2%. You refinance your loan at 1.7% for the first 3 years and plan to refinance it again when the fourth year comes at 2.4%.

However, if in the worst case, the interest rise way more than 2.4%, you will be dealing with losses. You must remember that the home loan interest rate has had a record of a downtrend for the last 10 years in Singapore and it is very unlikely they will go down but just up. Click here to read Determine the amount needed for home renovation loan

Don’t make a decision in a haste. Switching for a cheaper interest rate loan could actually lead to paying higher rate interest if not planned properly. It is advised that always carry out a proper analysis of past and future trends before making any decision of refinancing your home loan.

3. Refinancing when you are not eligible for the new restrictions

There are so many restrictions nowadays on how much can you borrow. One of them is TDSR (Total debt servicing ratio). Comparatively, these conditions are way more strict as compared to those of the 1990s or early 2000s when you could easily obtain a home loan.

 Refinancing demands complying with brand-new restrictions. This may include shorter loan tenure (resulting in higher monthly installment payments) or you may even disqualify for refinancing the home loan such as an unfinished lock-in period. There are other factors to check as well such as serving the 3 months prior notice period, subsidy reclaim, and TDSR.

4. Thinking that you found the best interest rate by opting for what appears to be the ‘best deal’

There are a lot of negotiations that may be possible between the borrower and the banker if contacted the banker directly without approaching any middleman.

Suppose you search for the ‘cheapest flight ticket’ online and you are navigated to a website that sells tickets online. Do you really believe that could be the cheapest ticket? Well, not all the time its possible that site was genuine. The same applies to home loans. The ‘cheapest home loans’ you find online are not always the cheapest. The banker and the borrower can actually negotiate a better deal such as by asking to pay a lesser commissioner to the banker.

However, in some cases, you may need to approach a broker to get the advertised rate from the bank. It is advised to check the authenticity of the loan comparison website you are using. At LoanBuddy, we offer you a wide range of interest rates offered by mainstream

5. Refinancing the home loan without having the funds to do it

Before you attempt to refinance, you must have the cash to cover the expenses involved in it. There are people who don’t have enough cash to pay for refinancing costs and they take credit card loans or personal loans to do it. This is just an act of foolishness – taking a loan to refinance a loan. What’s the use of refinancing when you have to pay higher interest on a loan taken to do refinancing? Assume you took a six percent per annum personal loan to refinance a loan to 1.7% interest per annum, sounds ridiculous right? This is like selling a $10 note at $8.

Hence please don’t obtain a personal loan or even a credit card loan to cover the expenses of refinancing your existing home loan liability. Unless you are going to pay it from your pocket, refinancing is not worth it.

6. Sticking with the same banker

Most people ask their existing lender to make a better deal. When in fact, they may find various interesting options outside. If you are loyal to your existing banker, then it’s good. However, it isn’t always the best. The process of refinancing is the same whether you stick to your current banker or find a new one. So explore and compare as many options as you can to avoid regretting later.

7. Refinancing at a wrong time

Time is an essential factor in refinancing. You must refinance your home loan at right time. Many people think to refinance while they are locked into a fixed interest rate – that’s not possible. One needs to wait until the fixed-interest term has ended. If you refinance before it ends, you will have to pay ‘break-cost’ fees. To avoid such an outlay of money from your pocket, find an appropriate time to refinance.

8. Using equity to finance and refinance

If your home loan has been in existence for a significant time now, you may have accumulated equity or value in the property. Some people in Singapore use this equity to finance a renovation or to even make a big buy. Doing this can be a bad choice in the current climate of hikes in interest rates and a big decline in home value. Hence you are advised to take this action with proper planning for the future.

What is the right time to look for refinancing your home loan in Singapore?

Obtaining a mortgage is an overwhelming process for those who are unaware of market and banking terms. The different features of different mortgages, the terminology involved, and the wide of options provided in the mortgage market requires time and dedication. You have to spare time to check and verify every option you go through to get the best deal.

For the entire duration of the lock-in period, you will have to stick with the chosen option of refinancing. Therefore, you need to conduct thorough research and make an informed decision accordingly. Here is the list of common problems borrowers face while reviewing refinancing options:

• They are not aware of the uses of features and facilities available in the mortgage.
• They think that mortgage is a ‘constant’ while its variable when market conditions change.
• They do not have enough knowledge about how refinancing is constructed.
• With multiple options in mind, they face confusion as to what is best.

It is advisable to review the refinancing way before so that you can gain knowledge to get the best deal in the end. Starting off at least 3 to 4 months prior before the lock-in period ends is a good time to shift for refinancing.

Compare Home refinancing rates.

Bankers and financial institutions take at least 3 to 4 weeks to process your loan refinancing application. If you take 4 months to go through the shortlisted options, you can get a better deal in the end and service your mortgage happily.