Back in 2011, I was convinced banks installed revolving doors just for home loan customers. People refinanced more often than we got to change underwear in NS. It was an industry norm; you’d pick the cheapest loan for three years, and then refinance on the fourth. Now from 2013 onward, it might not be that easy…but you can still save money:
“For long term customers, we give them more of everything. For example, we triple their charges.”
What is Refinancing Anyway?
Refinancing is the process of transferring your home loan to another bank. We have an article on it, but here’s the quick summary:
When you get a home loan package, it tends to look something like this (exact numbers may vary):
Year 1: 3 Months SIBOR + 0.85%
Year 2: 3 Months SIBOR + 0.85%
Year 3: 3 Months SIBOR + 0.85%
Year 4 and Thereafter: 3 Months SIBOR + 1.25%! Special loyalty bonus! Now with extra cost!
(Don’t know what 3 months SIBOR means? Timothy Kua can explain that)
When you refinance, you switch the home loan package on that all-important fourth year. This keeps the home loan interest rates low. Refinancing is especially important in Singapore, because bank loans do not have permanent fixed rates.
Quick Note: Refinancing vs. Repricing
“Time to reprice. Bring the daughter, I don’t want to be outnumbered when we’re arguing in the bank.” – True Story
Refinancing means switching your home loan to another bank. Repricing also means switching your home loan, but to a package offered by the same bank you’re with.
For example, if you switch from a CIMB home loan package to a DBS home loan package, that’s refinancing. If you switch from CIMB home loan package X to CIMB home loan package Y, that’s repricing.
There is little difference between the two, except that legal and administrative paperwork might be cheaper. Some home loan packages offer one or two free repricings.
Why is Refinancing Different in 2013?
A number of factors makes refinancing different: new cooling measures, changing property market, Ben Bernanke’s mouth, etc. But while refinancing decisions are tougher, that doesn’t mean you can’t save money from it. You just need to look out for these:
- Rising Interest Rates
- Restrictions on Loan Tenure
- The New TDSR Framework
- Legal Subsidies are Restricted
1. Rising Interest Rates
Interest rates are expected to rise, after being at their lowest for a decade. Now before you start ranting about Quantitative Easing, stop: contrary to popular belief, SIBOR hasn’t been shooting up like a heroin junkie.
Rather, the bank’s spread (the amount added to the 3 month SIBOR) has been going up. See, the recent slew of loan curbs has reduced the number of property buyers. That sucks for banks, who generate revenue by charging interest on home loans.
To make up for the falling number of borrowers, many banks are raising the interest they charge. This, more than anything, accounts for the rising rates.
This means home owners who want to refinance should check the “thereafter” rate on the new home loan they are eyeing (see the example above, where we wrote Year 4 and Thereafter). As interest rates rise, it might be wise to consider a good long term home loan package that has decent “thereafter” rates. Don’t be sucked into mistake of focusing only on the first 3 years and assume you can keep refinancing on the 4th year. Who knows, by then, the available home loan packages (4 years from now), might have year 1,2 and 3 rates that are higher than your existing “thereafter” rates. Nothing is 100% certain, but I’m just saying…
If you need help looking for good long term home loan packages, you can look for one at SmartLoans.sg.
2. Restrictions on Loan Tenure
Under the new home loan curbs, the maximum loan tenure is 30 years for HDB flats and 35 years for private properties. This cannot be stretched by refinancing. An example:
Say I’ve had the same HDB home loan package for 11 years at Bank A. When I refinance into a new one at Bank B, the maximum loan tenure for the new package would be (30 – 11) = 19 years. It doesn’t matter if you got a longer loan tenure before (e.g. 40 year loan tenure). Everything will be re-adjusted to current rules and regulations when you refinance at this point.
Shorter loan tenures mean higher monthly repayments, which in turn mean a higher Total Debt Servicing Ratio (TDSR). Some borrowers may not be able to refinance because of this.
3. The New TDSR Framework
There is a new TDSR framework for home loans. Here’s the most important thing you need to know:
When you refinance, you are subject to the new TDSR framework.
Refinancing means going through a whole process of credit checks again. Your Mortgage Servicing Ratio needs to be 30% or under, you get a haircut on variable income, etc. In particular, note that the TDSR framework takes into account all unsecured credit facilities, such as credit cards. This was not the case prior to 2013.
So because current loan restrictions are tighter than before, you may find that you no longer qualify for a home loan. Still, there’s no harm in trying to refinance, if your current rate is high.
(At worst, you’re just stuck with your existing loan package. There’s no cost to find out).
4. Legal Subsidies are Restricted
There are some legal costs when you refinance your home loan. You need to entrust somebody with the proceedings, and lawyers are paragons of honesty.
Well, the lawyer costs about $2,000 to $3,000, give or take. A repricing is cheaper, and might cost between $500 to $800 (Both can be paid by CPF).
In the past, the banks almost always subsidised the legal fees. But due to tweaks by the Monetary Authority of Singapore (MAS), a lot of banks are no longer allowed to do this. What this means is that if you want to refinance your home loan, you need to ensure your monthly savings are not negated by the legal fees you have to pay upfront. If you’re paying $3,000 in legal fees but saving $500/mth, that’s a worthwhile switch (it will take you 6 months to “break even”). However, if you’re paying $3,000 to save $50/mth, that might not be so worthwhile (it will take you 60 months or 5 years to “break even”).
The minimum loan size to get a legal subsidy (as of October 2013) is around $300,000 to $600,000. Many banks do not even offer legal subsidies. Some examples of banks that do (and their minimum loan size requirements) are:
ANZ – $300,000
Citibank – $400,000
SCB – $300,000
BOC – $600,000
Should You Refinance?
At the very least, you should compare your home loan rates every three to five years. There may be something cheaper on the market, and there’s no harm trying for it (at worst, you just don’t qualify). You can use this nifty calculator to check how much it’d save (or cost) you.
You should also refrain from taking on a personal loan, car loan, etc. if you intend to refinance. The added debt could drive your TDSR past the 60% limit.